The Fed is about to hike rates to control inflation
HARD TIMES AHEAD A person rides a scooter past a check cashing and payday loan store on Friday, March 11, 2022 (Manila March 12), in downtown Los Angeles, California. Consumer prices in the United States hit a new 40-year high in February 2022, as the world’s largest economy continued to be hit by a surge in inflation, the fallout from the Russian invasion of Ukraine are expected to worsen. AFP PHOTO
WASHINGTON DC: Soaring fuel, food and housing prices pushed US inflation to a four-decade high, and Russia’s invasion of Ukraine made matters worse. The Federal Reserve (Fed) is therefore preparing to act this week.
But the central bank’s efforts to put out the fires of inflation will be complicated by the prospect that war and far-reaching sanctions on Russia will disrupt trade flows and undermine America’s economic recovery.
The policy-setting Federal Open Market Committee is holding its two-day policy meeting this week, with an announcement slated for Wednesday when it is set to begin raising the benchmark lending rate that has been cut to zero at the start of the Covid-19 pandemic in March 2020.
It would be the first in a series of rate hikes, but amid growing uncertainty, some economists believe policymakers may be acting less aggressively than expected as they weigh competing forces on the economy.
“The Fed is being pulled in two different directions by the massive increase in energy prices that has happened in recent weeks,” David Wilcox, a former senior adviser to three successive Fed chairs.
While rising inflation justifies the tightening measures, “the reduction in purchasing power that households are experiencing (…) would call for a more accommodating policy, a more cautious approach,” said Wilcox, now with the Peterson Institute for International Economics and Bloomberg. Economy.
Markets forecast about six rate hikes this year, but Grant Thornton chief economist Diane Swonk predicts seven, while Wells Fargo raised its forecast from five to six, which would still leave the key rate below. by 2%.
Before Russia invaded Ukraine, some economists – and even some Fed officials – said the first step in the tightening cycle could be a half-point hike to send a strong signal to markets. that the central bank had pledged to keep inflation from raging. control.
But Fed Chairman Jerome Powell last week said he intended to call for a quarter-point hike – a surprisingly direct comment from a central bank chief, who usually keeps his plans close to the vest. .
Wilcox said he was “shocked” by the statement, which quelled speculation of a more aggressive move.
While Wilcox remains cautiously optimistic about falling inflation, he stressed that the Fed will need to be “absolutely clear” that it will act as forcefully as necessary should price pressures accelerate.
And in the short term, economists warn that things will get worse before they get better.
“The disruptions we’re seeing are fueling a well-lit fire of inflation that goes far beyond the energy sector and could affect much more of our daily lives,” Swonk said.
“The timing couldn’t be worse for the Federal Reserve, which is already chasing inflation for the first time since the 1980s.”
Supply chain issues caused shortages of key commodities as the global economy returned to normal post-pandemic and although increases were initially led by cars and housing, energy prices also increased, especially in the last month.
The annual consumer price index in February reached 7.9%.
“Almost everything that constitutes inflation is skyrocketing,” Adam Sarhan of 50 Park Investment told AFP, adding that he feared it was the kind of rapid increase that could lead to a recession.
The IMF (International Monetary Fund) warned last week that the fallout from the war will slow global growth, but the US economy is entering the latest crisis from a position of strength with a low unemployment rate after rising by 5.7 % last year.