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Inflation and the economy are slowing in the US, including the Fed – 02/01/2023 at 08:54


Fed Chairman Jerome Powell on December 14, 2022 in Washington (AFP / Nicholas Kamm)

The US central bank (Fed) is expected to announce another rate hike on Wednesday after the first meeting of the year, but by just a quarter of a percentage point, as economic activity and inflation show signs of slowing.

The Fed is preparing to raise interest rates for the eighth time in a row since March. These, which were then at zero, are now within a range of 4.25 to 4.50%.

But after several unusually high hikes of half a percentage point and even three-quarters of a percentage point, the Fed is likely to return to a more usual hike: just a quarter point, or 25 basis points.

This is “cautious given the slowdown in wage and price inflation and weak economic activity numbers,” notes Steve Englander, economist for Standard Chartered and former Fed economist.

Members of the Fed’s Monetary Policy Committee (FOMC) have been meeting since Tuesday morning. Their decision will be announced in a statement on Wednesday at 14:00 (19:00 GMT), and the institution’s president, Jerome Powell, will hold a press conference 30 minutes later.

– “Their work is done” –

A figure, published on Tuesday morning by the Department of Labor, seemed to convince economists that inflation is now on the right track: the average cost of an employee, with an increase in the fourth quarter less strong than in previous quarters.

Developments in the US central bank's key interest rate (AFP / )

Developments in the US central bank’s key interest rate (AFP / )

This “is likely to help convince the Fed to slow the pace further,” Lydia Boussour, an economist for EY Parthenon, said in a note.

“Going forward, with labor market conditions expected to worsen significantly, it is only a matter of time before wage growth slows more significantly,” she added.

Ian Shepherdson, chief economist of Pantheon, goes even further and even believes that “The Fed should not raise (its rates). Their job is done,” he tweeted.

And to warn: “Every new interest rate hike by the Fed from here on only increases the risk of a totally unnecessary recession”.

He therefore considers it possible that the expected increase this Wednesday will be the last in this cycle. Before a break.

Because the full effects of interest rate hikes take months to be felt in the economy.

The goal: to pressure the banks to raise interest rates on loans to households and businesses.

– Avoid recession –

Faced with inflation, which reached its highest level in more than 40 years in June, it was necessary to curb consumption to prevent prices from continuing their dizzying escalation.

A recruitment advertisement in a restaurant window on July 8, 2022 in Garden Grove, California (AFP/Robyn BECK)

A recruitment advertisement in a restaurant window on July 8, 2022 in Garden Grove, California (AFP/Robyn BECK)

“Inasmuch as we started from rates close to zero in the spring, it was necessary to act quickly. (…) It is now time to slow down the pace without stopping it”, declared Christopher Waller on January 20, a Fed governor.

Inflation thus fell in December to 5.0% over a year against 5.5% the month before, according to the PCE index, favored by the Fed, which wants to bring it back to around 2%.

Another measure of inflation, the CPI index to which pensions are indexed, also showed a sharp slowdown in December to 6.5% over a year from 7.1%.

“The tightening of monetary policy will certainly cool the economy and lower inflation,” Pierre-Olivier Gourinchas, chief economist of the International Monetary Fund (IMF), told reporters on Friday.

But with spending driving the U.S. economy, too much tightening could lead to a recession.

But “we still see a narrow possibility that the recession will be avoided in 2023 in the United States”, stressed Mr. Gourinchas referring to “a significant slowdown in growth” but without “necessarily” a decline in GDP (gross domestic product) or even recession.

The day after the Fed meets its European counterpart, the ECB. It started raising rates later than the Fed and should raise them again and even hint at further rate hikes.

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