The Fed will begin preparations to raise rates earlier than expected

The US Federal Reserve (Fed), pressured by persistently high inflation and encouraged by lower-than-expected unemployment, is preparing to set an agenda for higher interest rates next year tomorrow.

The market expects the monetary authorities to announce when and how much the cost of borrowing will have to increase to keep the economy in balance.

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

The abrupt narrative turn that the Reserve 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 widespread and persistent inflation that runs the risk of becoming entrenched in the expectations of companies and consumers.

“The Fed has to be a little more aggressive than it has been with the removal of expansionary policy,” said Tim Duy, chief US economist at SGH Macro Advisors.

Most analysts expect the Fed to maintain its forecast of three rate hikes in 2023 and 2024, given that a rapid decrease in price pressures is still expected in the second half of next year, as the pandemic is overcome.

For the moment, increases in consumer prices in the United States remain striking. In November, annual inflation reached 6.8%, its highest level since 1982 and well above the central bank’s 2% target.

The impact of the Omicron variant may keep inflationary pressures high by prolonging supply chain problems and exacerbating labor shortages, but with 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 its benchmark rate in the third quarter of next year, but like other analysts, they also point out that the risk is that the hike will come earlier.

Inflation is expected to peak until March 2022, just when the Fed has likely finished cutting its bond buying program, making it more difficult for managers to communicate a more patient course.

Unemployment level helps

What no longer appears 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 estimate in September of 4.8% for the end of the year.

A gradual increase in interest rates would allow the Fed to say that it is prioritizing price stability, but not at the expense of the employment target.



Reference-www.eleconomista.com.mx

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