Fed prepares to de-mark on inflationary fears for another uncertain year

The US Federal Reserve, pressured by persistently high inflation and encouraged by lower-than-expected unemployment, is set to set an agenda for higher interest rates next year on Wednesday, as its authorities announce when and how much it will have to pay. increase the cost of borrowing to keep the economy in balance.

Fed Chairman Jerome Powell has already pointed out that the committee that sets interest rates will likely announce at its strategy meeting this week that it will accelerate the end of its bond buying program, ending it in March instead of June. , in order to clear the way for the Fed to raise interest rates from near zero, where they have remained since March 2020, when the coronavirus pandemic triggered a brief but deep recession.

The sharp narrative turn that the central bank has taken to exit the period of emergency measures reflects the deep unease over the way in which the COVID-19 pandemic has suppressed demand, wreaked havoc on supply chains and caused a more generalized and persistent inflation that runs the risk of becoming entrenched in the expectations of companies and consumers.

This will lead the authorities in charge of monetary policy to advance their forecasts of interest rate hikes in their dot chart, as part of the forecasts published quarterly on economic growth, employment and inflation, as well as the calendar of interest rate hikes.

“The Fed has to be a bit more aggressive than it has been with the removal of expansionary policy“Said Tim Duy, chief US economist at SGH Macro Advisors, who expects managers to revise their median forecast to two rate hikes next year to curb inflation levels, starting with a split at their last meeting on the fact if they even need one.

Most analysts expect the Fed to maintain its forecast of three rate hikes in 2023 and 2024, as its leaders still expect a rapid decline in price pressures in the second half of next year, as the pandemic be surpassed.

For the moment, increases in consumer prices in the United States remain striking. In November they continued to rise, marking the biggest annual rise of 6.8% since 1982, data from the Labor Department showed on Friday, and well above the central bank’s 2% flexible average target.

The impact of the omicron variant may also keep inflationary pressures high by prolonging supply chain problems and exacerbating labor shortages, but doing less damage to economic growth than previous waves.

When the Fed actually starts the rate hike process is less certain. Economists polled by Reuters expect the Fed to raise interest rates in the third quarter of next year, but like other analysts, they also point out that the risk is that the hike will come sooner.

Inflation is not expected to peak until March next year, just when the Fed is likely to have finished cutting its bond buying program, making it more difficult for managers to communicate a more patient course.

Investors currently see a greater than 50% chance that the Fed will raise its overnight benchmark interest rate in May, according to CME Group’s FedWatch tool.

In addition to the dot charts, investors would do well to scrutinize Powell, who has taken a more emboldened stance in changing the Fed consensus, for his perception of the outlook for next year.

“If Powell is in favor of two rate hikes next year, that’s a pretty strong indication that there will be a rate hike in the middle of next year.”Said Gregory Daco, chief US economist at Oxford Economics.

The unemployment rate helps

What no longer seems to hamper the Federal Reserve’s tightening of monetary policy is the pace of employment growth, as the central bank is on track to reach its maximum employment target by the middle of next year.

The unemployment rate fell to 4.2% in November, well below the Fed’s September estimate of 4.8% for the end of the year.

The central bank authorities will lower their unemployment estimates for this year and next. Its economic growth forecasts, which will be revised slightly lower this year, could remain largely intact.

The objective of the Federal Reserve is to maintain a trajectory of gradual increases after the start, so as not to slow down the recovery of the labor market and to encourage the continuous improvement of the labor force participation rate, according to economists at Morgan Stanley wrote in a note to customers.

This rate, which is a key indicator of the health of the labor market and closely followed by those responsible for monetary policy, stands at 61.8%, that is, 1.5 percentage points below its pre-pandemic level, and shows only moderate signs of improvement.

A gradual rise in interest rates would allow the Federal Reserve to say that it is prioritizing price stability, but not at the expense of the broad and inclusive employment objective it has advocated.

But, as with any forecast, reality may again divert the Fed from its course, as both the central bank and the rest of the world await news about the severity and contagion of the omicron variant, which is already complicating operations. hopes for a smoother path next year and increasing volatility in financial markets.

“The uncertainty of the outlook has increasedDaco said. “That will be a feature of next year’s environment, in which there is less certainty about what monetary policy will be and less certain about what the economic outlook will be.”.