May 18, 2022 10:18 pm

The Fed points to a rate hike in March

Correspondent in New York



The first rate hike by the US Federal Reserve in more than three years is just around the corner. This has been evidenced by the US central bank after this week’s meeting of its Federal Open Market Committee, the body in charge of its decisions on monetary policy.

With an inflation well above 2% and with a strong labor market, the committee hopes that it will soon be appropriate to raise the range for rates,” their statement said. Due to the language chosen by the Fed – specifically, the mention “soon” – and the economic situation in the US, everything points to the fact that this first increase will be approved at the next committee meeting, in March.

Since the economic crisis unleashed by the Covid-19 pandemic, the Fed has established very low rates -from 0% to 0.25%- and launched strong asset purchase programs, all with the aim of stimulating the economy of the first power world.

The president of the Fed, Jerome Powell, later confirmed in a press conference that the rate hike in March is the most likely scenario. “The economy no longer need support sustained monetary policy,” he said.

It is not a surprise that the Fed is now close to rate hikes, a situation that has been taken for granted since the end of last year, when inflationary pressure in the US was soaring. After the government of Joe Biden and the Fed authorities themselves defended for months that the price increase was a “transitional” situation -arising from the stimuli and economic recovery related to the evolution of the pandemic-, inflation has made it clear that he is here to stay. And the Fed, one of whose central mandates is to make sure that prices don’t run amok, has to take matters into its own hands.

Even more so after the data on price trends for this month will show inflation of 7% compared to the same period last year, a rise not seen in the US for almost forty years. The other indicator that the Fed most closely follows for its monetary policy decisions, the labor market, is on the right track: unemployment plummeted 5.9% in June to 3.9% of last December.

Soaring inflation had sparked the debate over whether the Fed should act even more quickly, and even decree a rate hike at its meeting this week. It would have been a surprise and it did not materialize, something that could help reassure the markets, which have suffered turbulence and strong volatility in recent days.

It remains to be seen what the Fed’s rate hike schedule will be. In its latest forecast, announced at last December’s meeting, the central bank anticipated three rate hikes – each of 0.25 points – this year and others three in 2022. The markets, however, predict that there will be four this year, until the interest rate drops to 1%.

As part of the tightening of its monetary policy, in addition to raising rates, the Fed will continue to reduce its bond purchase program, which will be only 30,000 million in the month of February, which indicates that it could end that program in March as well.

Lastly, the Fed has also indicated that it will start the program to thin its balance sheet more quickly, which will be done gradually and based on not renewing the debt that reaches the maturity date. The exact pace for that process will be known “in the coming months.”

The end of all these measures has to do with leaving behind the economic emergency situation typical of the pandemic, something that Powell already advanced this month in an appearance in Congress. The balance Powell and the Fed seek is for the economy to do not overheat -as skyrocketing inflation can show-, but that it should not be weighed down by an early end to the stimuli, as the markets may fear.

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