The “unconditional” commitment to lower inflation by the president of the United States Federal Reserve (FED), Jerome Powell, reveals that the agency is going to use all its tools to try to neutralize the rise in prices in the short term and prevent this from affecting economic growth.
Although many analysts in the market take a recessionary cycle almost for granted, the FED authorities are betting that the impact will not be so serious.
The market evaluation and decision has two supporting legs:
• On the one hand, the shares still have significantly high prices compared to the profits obtained by the companies in their latest balance sheets, which allows us to infer that there is still room for correction.
• On the other hand, the labor market is showing a robustness rarely seen, and the almost 11 million vacancies available reveal that there is a wide labor supply that does not find an answer in demand.
The head of the FED said in Washington that it was possible “to reduce inflation without damaging the labor market”, and that “The goal is to relieve demand and not cause unemployment”according to the Bloomberg agency.
The former deputy managing director of the International Monetary Fund (IMF), Anne Krueger, warned days ago that “although the war against inflation must be waged largely through monetary and fiscal policy, the administration could do much to help reduce inflationary pressures. In fact, the administration risks adding even more inflationary pressure.”
The support of governors and governors
For the authorities, if interest rates are raised sharply and economic growth is temporarily slowed down, there will be no destruction of jobs but rather less labor supply. Hence, the FED governors believe that the moment for the monetary tightening is now.
Most of the members of the Federal Open Market Committee of the Fed are inclined to gain ground quickly and raise rates as high as possible to defeat inflation, the highest in the last 40 years.
Thus, the governor of the FED, michelle bowmantold bankers in Massachusetts that he supports raising rates by 75 basis points next month, and then continuing with hikes of at least 50 basis points until price pressures cool.
In the same sense, another governor of the organism, Christopher Wallersaid he would support another 75 basis point move at the July meeting, the last before the summer break.
The president of the Minneapolis Fed, neel kashkariand his pair from Chicago, Charles Evanshave also hardened their original positions and suggested that a measure of that size was reasonable for debate next month.
The Fed has so far raised rates by 1.5 percentage points this year and officials forecast a hike of about 1.75 percentage points of further cumulative tightening, with the idea of ending 2022 with a benchmark federal funds rate. of 3.5%.
“Our tools are blunt, but they are the right tools to deal with broad aggregate demand”Jerome Powell
This policy would put a brake on inflation and put the economy on the right track, albeit at some cost to the level of activity.
However, it is not the only concern that exists among investors, since as of next month the FED will begin to return to the market the Treasury Bonds and the mortgages that it was forced to buy from the banks, after the crisis of the subprime in 2008.
The agency announced that it would return some US$35,000 million in public securities and others $17.5 billion in mortgageswhich will subtract greater liquidity from the market.
Some investors are in a state of panic. It is that during the first half, the market corrected prices and stock market capitalization indices fell sharply.
During the first half of the year, companies listed on the S&P 500 left around US$2 trillion on the road, according to private estimates.
Investors fear the Fed could trigger a recessionand Powell told lawmakers such an outcome was “certainly a possibility,” though not something the Fed is targeting or believes is necessary to bring inflation down to the central bank’s 2% target.
An eventual recessionary cycle could cost President Biden not only the legislative elections in November, but also his re-election.
“Our tools are blunt, but they are the right tools to address broad aggregate demand,” Powell said.
