Washington (AFP)
On Tuesday and Wednesday, the US Central Bank will face a difficult equation related to interest rates and to what extent they should be raised during the current year to contain inflation without plunging the largest global economy into recession.
Raising interest rates would control demand and slow price increases.
Last March, the US Federal Reserve began cautiously raising these rates, with an increase of 0.25 percentage points, which was the first since 2018.
At the conclusion of a two-day meeting, this time the MPC is expected to approve an increase of 0.50%. Federal Reserve Chairman Jerome Powell had personally announced that this increase “will be on the table.”
He said during a seminar for central bank governors on the sidelines of the International Monetary Fund meetings that it is “very necessary” to stabilize prices and raise interest rates “quickly”.
Some Federal Reserve officials went as far as stressing the need to adopt a gradual policy in the face of persistently rising inflation and a labor market that is witnessing tension.
Some are calling for the adoption of similar increases during the next meeting of the US Federal Reserve in June.
Action has become an urgent necessity, while inflation, exacerbated by the Russian-Ukrainian war, is at its highest level since the early eighties of the last century. The “BCE” index, which is adopted by the Federal Reserve as a benchmark, showed an increase in prices by 6.6% in March at an annual rate. As for the other index (CPI), which adopts a different method of calculation, it showed that inflation reached 8.5%, the highest increase since December 1981.
tightrope
Officials of the US financial institution find themselves on a tightrope. Parallel to inflationary pressures fueled by the recent closures in China, which exacerbated the problems of global supply chains, growth is slowing in the world.
The tools available to the US Federal Reserve are among the most effective to control demand and subsequently slow down the pace of inflation.
In addition to interest rates, the US Central Bank is expected to approve the start of reducing huge debt purchase plans, which is another major stage in returning the situation to normal. Federal Reserve officials must strike a delicate balancing act by calming without reining in demand because consumption remains the main driver of US growth. The US GDP declined by 1.4% during the first quarter of this year.
However, Gregory Dako, chief economist at eParthenon, believes that this does not require a change in the direction of the US central bank, pointing to very strong domestic demand.
“Americans travel even though tickets are expensive, and they go to the cinemas and theaters while restaurants are full,” he stressed in an interview with Agence France-Presse.
Like many economists, he expected the Fed to raise rates by half a percentage point during Wednesday’s meeting and the next meeting in June.
While a recession is not considered imminent, experts do not rule out that it will happen at the beginning of next year if prices remain high despite the increase in interest rates. “The Fed’s work is very complicated by internal economic conditions that are difficult to understand, as well as the uneven framework of the global economic recovery,” said Gregory Baco.
During his regular press conference on Wednesday afternoon, Jerome Powell will certainly be asked about the possible increases in interest rates that the Monetary Committee intends to pass during the current year.
Gregory Bacow stressed, “If the Federal Reserve really wants to have a quiet landing process,” in other words, to tighten monetary policy without dumping the economy into a recession, “it must indicate where the drop is located and when it is expected to reach it, which is an essential element.”
But economists at BNP Paribas consider it “unlikely that Jerome Powell will reveal a specific number” or the level of interest rates that the Federal Reserve aspires to during the current meeting.