May 27, 2022

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The Federal Reserve is seeking a "smooth landing"

The Federal Reserve is seeking a “smooth landing”

The US Federal Reserve faces a decisive decision on Wednesday; He must raise his key interest rates to combat inflation after two years to combat the effects of “Govt 19”, at a time when economic prospects are once again clouded by the war in Ukraine.

The goal of the US Federal Reserve’s move is to force commercial banks to impose higher interest rates on loans to their customers. , Which negatively affects economic growth rates.

With inflation at its highest level since 1982, the Federal Reserve, which holds monetary policy meetings on Tuesday and Wednesday, is seeking to unleash the movement.

Jerome Powell, head of the Reserve Bank, recently expressed confidence in the company’s ability to ensure a “smooth landfall” for the economy that would allow it to control inflation without causing inflation. However, the “balance” in this very important issue must be approached with caution.

“The contingency of high inflation and slow growth (Federal Reserve) is causing a dilemma,” economists at Wells Barco Bank explained in a note.

They may prioritize lowering inflation, especially since it has “gained more credibility as a defender of price stability over the past decades”. Experts expect 6 per cent interest rates to increase by a quarter percentage point (0.25 per cent) in 2022.

The administration of US President Joe Biden believes the ball is now in the “Federal Reserve” court, and Treasury Secretary Janet Yellen, on Thursday, assured that the move to move the central bank was “appropriate”. CNBC “Soft Landing” is also waiting.

From March 2020, key interest rates will be in the lower range between zero and 0.25 percent, and the “Federal Reserve” will gradually increase them gradually from 0.25 percentage points, but the hypothesis of a large increase of 0.50 points appeared at a possible time.

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Jerome Powell, however, was very clear during the congressional hearing in early March; “I would like to suggest and support an increase in interest rates by 25 basis points,” he said.

No one in the market expects a half-point increase, but almost everyone (95.9 percent of customers) wants only a quarter of a point, while others expect interest rates to remain current, according to estimates of future products released. Through the CME Group Market. .

In Europe, where inflation is low, the European Central Bank on Thursday decided to keep its interest rates current, the lowest level in history.

According to the Consumer Price Index released by the Commerce Department, the annual inflation rate in the United States rose to 7.9 percent in February, and the war in Ukraine led to further increases in petrol and food prices. The Federal Reserve relies on another indicator, the per capita consumption expenditure price index, which rose to +6.1 percent year-on-year last January.

All this raises fears that the inflation crisis, which topped 10 percent in the early 1970s and early 1980s, will be followed by the Federal Reserve raising its interest rates to 20 percent, which allowed inflation to ease. , But pushed the country into an economic downturn.

Economists in Wells Fargo say, “In the 1970s, (Federal Reserve) decision-makers had to organize a painful deflation … (Fed) engraved in memory.”

The economist at Grant Thornton expressed his concern about “rising inflation expectations and entering a more dangerous pay / price cycle”, at which point the labor shortage is already leading to wage increases. But he added, “(We have not yet reached this point, and (like the Federal Reserve), like other central banks, has promised to avoid a recurrence in the 1970s.”

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The U.S. job market is currently in a deep slump as the unemployment rate fell to 3.8 percent in February.

The Federal Reserve is expected to consider the right time to reduce its easing program by phasing out billions of dollars in securities and other assets purchased since March 2020 to support the economy.