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Powell insists that it is necessary to continue raising interest rates

Powell insists that it is necessary to continue raising interest rates

The Chairman of the Federal Reserve (fed) US, Jerome Powellinsisted on Tuesday that it will be necessary to continue raising interest rates for a while since the “disinflation” process has only just begun and “has a long way to go.”

“We think we’ll need to raise rates further, as we said, and we think we’ll need to keep policy tight for a period,” a time that won’t be “mild” but “probably bumpy,” he noted in a talk at the Economic Club of Washington.

The president of the regulatory body recalled that the objective of the Fed is to return inflation to 2% and that this will not be immediate. Although the Fed expects 2023 “to be a year of significant declines,” Powell noted, “it will take, not just this year, but next year, to come down close to 2%.”

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So, he insisted “we will have to do more rate increases and then we will have to look around and see if we have done enough.”

Powell made these statements a week after the Federal Reserve announced the eighth consecutive increase in interest rates, of a quarter point, which confirmed a slowdown in increases.

With this rise, less than the previous increases, the rates stood in a range between 4.5% and 4.75%, the highest figure since September 2007.

Since it reached its peak in June (9.1%), inflation in USA it has eased to 6.5% and in December it fell for the sixth consecutive month, a figure that analysts say is a sign that rate hikes are beginning to have an effect on the US economy.

However, the labor market remains strong, as the January data shows. More than half a million jobs were created, something “that nobody expected,” Powell acknowledged, and which calls into question traditional economic theories that say that rate hikes strongly affect a country’s labor market.

“If you look at history there is some weakening in the labor market (when rates are raised) and that is still possible, but this cycle is different from other cycles,” he pointed out, mainly because of the end of the pandemic.

Now, explained the president of the regulator, if the supply of workers is observed against the demand for workers, the demand is 5 million greater than the available supply.

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“This was not the case prior to the pandemic, which has left a significant and lasting mark on the US workforce,” pointed.

In his opinion, although to lower inflation the economy will have to relax, it is not a bad thing that the labor market remains strong. “The job market is strong because the economy is strong. And as I mentioned, it’s good that we were able to see the beginnings of disinflation without seeing the labor market weaken.” said.

On January 26, it was learned that the United States economy grew 2.1% in 2022, according to the first calculation of the annual gross domestic product (GDP) calculated by the Bureau of Economic Analysis (BEA).

According to this statistic, the US GDP increased 0.7% compared to the previous quarter, which would mean an annual growth rate of 2.9%.

By 2023, the economy is expected to moderate. According to the latest estimates of the International Monetary Fund (IMF), the United States will grow 1.4% in 2023 and only 1% in 2024.

All of this in a context marked by uncertainty over the war in Ukraine and waiting for the interest rate hikes, which are also being carried out by other central banks, to have side effects beyond the drop in inflation.

To try to put a stop to inflation, the Fed began a series of rate hikes in March 2022 with a timid 0.25%. In May it raised rates by half a point and in June it began a series of increases of 75 integers, before reducing the increase again and increasing 0.5% last December.

Source: Gestion

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