The Fed promises “soon” a first rate hike


The key rate has been kept at zero since March 2020 to stimulate credit supply as much as possible.

The Federal Reserve is preparing its first key rate hike since 2018 for March. fed funds rate, it sets the price at which the Fed lets banks lend each other very short-term liquidity. It has been kept at zero since March 2020 to stimulate the supply of credit as much as possible.

“With inflation well above 2% and the labor market strong, the committee expects it will soon be appropriate to raise the fed funds rate target”, says the press release,
released Wednesday night in Washington. The Fed’s monetary committee also confirms that it will put an end to its public debt purchases in early March. Fed leaders also say they have agreed on a set of principles for “significantly reduce” the size of the central bank’s balance sheet. The possible start date of this reduction is not specified.

Record inflation

The Fed’s balance sheet has soared to almost $9 trillion due to massive public debt buybacks since March 2020. The Fed is trying to regain credibility by showing a determination to normalize its monetary policy. Full employment has practically been achieved, with an unemployment rate falling to 3.9%. By contrast, inflation in 2021 shattered central bank projections to reach 7%.

Jerome Powell and his colleagues are criticized for having underestimated the risk of a price surge which has reached its highest level since 1982. They are also singled out for having waited until the beginning of November to admit that an exit from their public debt buyback policy had become necessary. Last year alone, the Fed bought another $1 trillion in Treasury bonds and some $570 billion in mortgage-backed bonds. In doing so, it helped maintain abnormally low interest rates, and facilitated an explosion in public spending.

Still, some of the forces that fueled inflation in 2021 are expected to gradually fade away in 2022, regardless of Fed policy. On the one hand, it is a reduction of bottlenecks and shortages of materials which are hampering production and which are linked to the pandemic. On the other hand, the US economy will no longer feel the stimulating effect of the massive recovery plans adopted last winter. However, this direct aid to consumers has clearly exacerbated the excess demand in relation to supply, which is fueling inflation.

Modest and transient effect of the Omicron variant

Conversely, the US central bank continues to expect a negative, but modest and temporary, effect of the Omicron variant on the economy. A prolongation of the pandemic would therefore not at all serve its now priority objective of combating inflation. It would certainly weigh on demand, but it would also maintain the inflationary dysfunctions in the production chains which weigh down supply.



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