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The American Central Bank is counting on higher than expected inflation in 2021 and 2022. To contain it, it announced on Wednesday that it would stop its support measures for the economy earlier than expected, paving the way for three rate hikes. directors in 2022.

Inflation in the United States is expected to be 5.3% in 2021 and 2.6% in 2022, the Central Bank (Fed) said after the meeting of its monetary policy committee. It forecast in September only 4.2% and 2.2%.

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To counter this escalation, the powerful institution plans to stop its asset purchases in March, three months ahead of the initial schedule; it will then be able to raise its key rates, and its officials are now unanimous in launching the movement in 2022, the majority even anticipating raising them three times.

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The general rise in consumer prices, which is proving to be more persistent than expected, is severely penalizing households in the United States.

Efficient tool

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President Joe Biden has vowed to turn the tide. But its room for maneuver is limited. Rising interest rates, which slows demand by increasing borrowing costs, are the most effective tool to temper inflationary pressure.

The Federal Reserve (Fed) has therefore decided to move up a gear by bringing forward by a few months the end of the reduction in asset purchases (“tapering”), a prerequisite for the rate hike, has -She announced Wednesday at the end of the two-day meeting of its monetary committee, the FOMC.

This reduction in monetary support will end in March and not in June, as initially planned. The institution said it was “ready to adjust the pace of (asset) repurchase if changes in the economic outlook warranted,” she said in a statement.

First since 1982

A majority of FOMC members now anticipate up to three rate hikes in 2022.

The institution, which had rescued the economy in record time in the spring of 2020, now recognizes that there is an urgent need to act when inflation reached 6.8% in November year-on-year. Unheard of since June 1982. It is also well above its target of around 2%, considered healthy for the economy.

The Fed nevertheless stresses that it will keep its rates low as long as the job market does not improve further.

For now, it projects an unemployment rate of 4.3% this year before 3.5% in 2022, the level of February 2020 just before the spread of the pandemic in the United States.

Its recently appointed president Jerome Powell is eagerly awaited for his vision of the job market and growth prospects. A sharp rise in interest rates could jeopardize growth already slowed by the Covid-19 variants.

Not immediate

Moreover, while the hike in the key rate is an effective tool to reduce inflation, its effect is not immediate. Usually the impact is tangible 6 to 12 months later.

“The main reason is that the key interest rate takes a while to be reflected in short-term and medium-term lending rates,” said Gregory Daco, chief economist at Oxford Economics. We must therefore be patient before consumption and investments slow down and ultimately moderate inflation.

And the question is how much interest rates, currently in the 0% to 0.25% range, will be raised. According to new Fed projections, 2021 growth will amount to 5.5% against 5.9% projected in September.

Too much money in the economy?

At his press conference Wednesday night, Jerome Powell is expected to stress the need to be adaptable given the many uncertainties. The rapid spread of the Omicron variant, which has prompted some countries to re-impose restrictions, further complicates its task.

Not to mention the ambient political pressure. Joe Biden, who is no longer popular in public opinion, is accused by the Republican opposition and even in his Democratic camp, of fueling inflation by injecting too much liquidity into the economy.

Last March, he promulgated a $ 1.9 trillion emergency plan after more than $ 3.6 trillion injected in 2020.

In mid-November, he signed a 1.2 trillion billion dollar infrastructure plan. He is now pushing for a plan of social and environmental reforms of some 1800 billion.

It’s too much, Republicans say. These latest plans are spread over a decade, defends the Biden administration, which even calls them anti-inflationists.

This article was published automatically. Sources: ats / afp

Source From: Google News

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