The increase in prices in the United States will focus the Tuesday and Wednesday meeting of the Federal Reserve (Fed, central bank), although it is not expected to reduce its support for the economy until it sees improvements in employment.
Cars, houses, gasoline, clothes, … a wide range of products became more expensive for Americans.
However, Fed Chairman Jerome Powell is expected to maintain monetary policy arguing that the price hike will only be temporary. For several months now, he has put aside the ghosts of the runaway inflation of the 70s.
“Fed officials will continue to anticipate that the current supply-demand imbalance will resolve itself in the coming months,” predicts Kathy Bostjancic of Oxford Economics.
Prices rose 5% in May compared to last year, according to the IPC index. Although the increase is very marked, it is largely due to the effect of comparison with prices that had fallen in the spring of 2020.
The Fed uses another index, the PCE, to measure inflation, which in April increased by 3.6% annually, its biggest rise since 2007.
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The Federal Reserve is closely monitoring inflation, although it is unlikely to decide this week to reduce its support for the US economy.
In fact, the country is still far from having fully recovered from the crisis caused by the COVID-19 pandemic and from reaching the Fed’s employment target. Too fast a tightening would jeopardize a sustainable recovery, especially in the labor market. .
The unemployment rate fell to 5.8%, but is still well above the 3.5% registered before the crisis. In addition, there is still a deficit of 7.6 million jobs with respect to that period.
“Nobody knows if people are going to go back to work or not,” Omari Swinton, a professor of economics at Howard University, told AFP, stressing that “making sure the job recovery is strong is more important than inflation. “.
Paradoxically, American companies are facing difficulties in hiring, especially in lower-category positions, so they are raising the salaries of those jobs to attract candidates, which maintains inflation.
Probably, the Fed “will not raise interest rates. But it will have to start thinking about other ways to deal with” this problem, the economist added.
Overnight interest rates, which fell to a range of 0% to 0.25% in March 2020, are likely to remain at this level for some time. Each member of the commission will say when they think it is appropriate to review them: in March, four of them proposed an increase for 2022 instead of 2023, and one of them proposed raising them in December.
Future strategy
However, the 11 members of the monetary committee could begin to think about the strategy for the future, now that the recovery is on track and in the face of rising prices.
At their last meeting, at the end of April, some raised, for the first time, to start discussing a reduction in asset purchases, to avoid overheating.
The Fed buys $ 120 billion in assets each month, including Treasuries, to facilitate credit, support the recovery and influence downward interest rates.
Kathy Bostjancic foresees “a gradual reduction … starting in early 2022” before starting to raise rates in 2023.
The Fed will also review its economic forecasts. In March, it expected GDP growth of 6.5% in 2021 and 3.3% in 2022.
He was also more optimistic about the unemployment rate than in his previous forecasts, published in December: 4.5% this year, 3.9% in 2022, 3.5% in 2023, that is, the level before the crisis, the lowest in 50 years.
And for inflation, it forecasts 2.4% in 2021, before stabilizing at around 2%, in line with its long-term target.
