Tighten monetary policy to counter high inflation, without plunging the economy into recession: such is the ambition of the American central bank (Federal Reserve, Fed). And which, according to New York branch president John Williams, is achievable.
“I think we can achieve a soft landing,” he said during an interview for Bloomberg TV on Thursday March 14, acknowledging however that “It wasn’t going to be easy.” “I’m not going to pretend that (…) everything will go exactly as planned”evoking “a unique set of circumstances” linked to the pandemic and the war in Ukraine.
However, he considers that the current increase in key rates, a strategy initiated by the Fed since March (its key rates went from 0 to 0.25% to 0.25 to 0.50%), associated with the reduction in the balance sheet which could be announced at the next monetary meeting in early May and start in June, should put inflation back on track.
“I think the (monetary) policy is good, to restore the balance between supply and demand and allow us to bring inflation down,” a souligné John Williams.
Inflation in the United States is at its highest for more than 40 years, at 8.5% over one year according to the CPI index. The Fed, however, favors another indicator, the PCE index, which rose to 6.4% year on year in February, according to the most recent data available.
Another rate hike in May?
One question remains, however: has inflation peaked and then declined as some economists predict? In any case, this is what Christopher Waller, an official of the American central bank who is betting on the ebb, thinks. “I think we could be at the top” inflation, this Fed governor declared on the CNBC channel on Thursday March 14, anticipating “a slowdown in the coming months”.
Christopher Waller nevertheless estimates that the Fed will raise its rates by half a percentage point at the next meeting, on May 3-4. “And maybe again in June and July”, he added. The institution has not resorted to such an increase since 2000.
The governor also considers it appropriate to approach ” as soon as possible “ the rate level considered neutral, i.e. 2 or 2.50%, and “exceed it (…) probably by the second half of this year”.
Reducing inflation without curbing the economy: “a fantasy”
Not all Fed members share this view. Another voting member of the monetary committee, James Bullard, president of the St Louis Fed, affirmed on Wednesday March 13 in an interview with the Financial Times, that it was “a fantasy” to think that the American institution could sufficiently reduce inflation without raising rates to a level that is restricting the economy.
This ‘hawkish’ pro-dovish policy maker – a term for members of the Fed who prioritize fighting inflation, as opposed to ‘doves’ who focus on growth and jobs – believes the Fed should be more aggressive in its screw turns, and that reaching the so-called neutral rate “will not be enough”.
“Neutrality does not put downward pressure on inflation. It just ceases to exert upward pressure,” did he declare. Gold, “we need to put downward pressure on the component of inflation that we think is persistent,” he added.
James Bullard had, at the March meeting, been the only one to vote against a quarter-point hike, believing that raising rates by half a point directly would have been more appropriate.
Rates remain unchanged in Europe
American policy is in any case very different from that chosen by the European Central Bank (ECB). The institution confirmed Thursday, April 14 during the meeting of its board of governors its desire to tighten its monetary policy, by ceasing its bond asset buyback program during the third quarter of this year. Until then, it will steadily reduce its net monthly bond purchases, by 40 billion euros in April, 30 billion euros in May and 20 billion euros in June, confirming earlier plans, the report said. communicated.
The ECB is therefore leaving its key rates (0.5%, 0% and -0.5%) unchanged for almost eight years for the time being, while the inflation rate reached 7.5% in March on a year in the euro zone, well above the 2% target that the ECB must aim for.
(With AFP)
