With the US economy slowing, the Fed focuses on inflation

Dark clouds are gathering over the US economy, but the Federal Reserve (Fed)which will meet this week, maintains the course of its strategy despite the looming storm and seeks to continue trying to tame the inflation.

The priority of the Fed (central bank), whose economic policy committee will deliberate Tuesday and Wednesday, is to prevent inflation expectations from consolidating and making it impossible to bring it back to the planned target, or that the economic cost is even greater.

“The big question is if, and with what speed, inflation will continue its downward trajectory towards our 2% target”declared on April 21 one of the governors of the Fed, Lisa Cook.

For now, the Fed has chosen to respond quickly and forcefully, raising rates from a range of 0% to the 0.25% up to one of 4.75% to the 5% in just over a year; sometimes with strong increases of 0.75 percentage points.

Fed Chairman Jerome Powell made no secret of the fact that “The road for inflation to return to 2% will be long and may be bumpy.”

There are several signs of the slowdown in the world’s largest economy, starting with growth, which in the first quarter was barely 0.3% compared to the previous quarter, and 1.1% in annual rhythm.

Most analysts warn that the probability of a recession has increased significantly and may even be stronger than expected.

“Our data makes us think that monetary tightening and the recent tensions in the banking system will lead to a mild recession, although stronger than we had anticipated”Ryan Sweet, chief economist at Oxford Economics, told AFP.

Monetary policy tightening is now real. Until now, although interest rates rose, the real interest rate, that is, taking inflation into account, remained negative, but this is no longer the case.

March inflation dropped to 4.2% according to the PCE index, which is the one taken into account by the Fed, that is, less than the main rate, which is between 4.75% and the 5%.

few doubts

At the same time, the situation in the financial sector has not improved since the previous Fed meeting in March.

Following the bankruptcy of SVB and Signature Bank, the United States seized and then sold First Republic, the second largest bank by assets to collapse in US history, to JPMorgan Chase.

Banks fell after a run on deposits as the value of their assets fell and clients withdrew money amid rising interest rates.

Most regional banks suffered from the erosion of their net interest income, that is, the difference between the interest they earn from lending money and the interest they pay to savers who deposit.

The sector’s problems mark the extent to which banks, particularly medium-sized ones, begin to suffer the consequences of high rates.

The outlook can bring “a tightening of credit conditions for households and companies, which could slow down activity and employment”Patrick Harker, president of the Fed’s Philadelphia branch, said on April 20.

That is the objective of the Fed, as Powell stressed after the last meeting, on March 22, considering that this credit tightening could have the same effect as a rate hike.

Will the Fed then continue to raise rates? There is little doubt in the market that it will, and it is expected to rise another 0.25 percentage points on Wednesday.

None of the latest statements by the bank’s executives leads us to expect otherwise.

Although inflation fell sharply in March, core inflation, that is, that which excludes food and energy prices, fell more slowly to 4.6% and now exceeds general inflation (4.2%).

The International Monetary Fund (IMF) on Thursday called on European central banks to “kill the beast” of inflation and not be tempted to give up. “a breath” under penalty of generating “a second damage to the economy”.

That logic is the same on the other side of the Atlantic, especially when unemployment remains low, allowing the Fed to focus solely on fighting inflation.

Source: AFP