On Wednesday, US central bankers are poised to take the first step to raise borrowing costs in a bid to limit rising inflation before it spirals out of control.
The Federal Reserve will have to walk a tightrope to ensure its efforts don’t derail the recovery from the Covid-19 pandemic as Russia’s invasion of Ukraine introduces new uncertainty into a battered economy. supply chain issues and labor shortages.
“There’s no right answer to that in any economics textbook,” David Wilcox, a former senior Fed adviser, told AFP, noting that the central bank’s communication of its willingness to act will be essential for a successful balance exercise.
The central bank’s Federal Open Market Committee is expected to announce its rate decision at 6:00 p.m. GMT, at the end of its two-day meeting.
Fed Chairman Jerome Powell said he favors raising the benchmark interest rate by 0.25 percentage points from zero, where it has been since March 2020.
It would be the first in a series of hikes, which would undo the stimulus hastily put in place at the start of the Covid-19 pandemic.
The Fed chief said he was confident inflation would ease in the coming months as supply chain issues and shortages were resolved in the world’s largest economy.
But the latest shutdowns of several cities in China, affecting tens of millions of people and shutting down a key supplier to US tech giant Apple, show that the pandemic and its disruptions are not over.
Policymakers are better equipped to deal with inflation that is too high rather than too low, as was the case in the decade following the 2008 global financial crisis, when inflation and employment time to recover.
However, with the annual consumer price index rising 7.9% in February, its fastest pace in four decades, the central bank is facing heavy criticism that it has missed the danger of inflation and moved too slowly in response to rising car, housing and food prices. .
And the war in Ukraine as well as Western sanctions against Russia pushed oil prices higher, although they fell back on Tuesday, closing below $100 a barrel for the first time in three weeks.
– The price increase is essential –
“The Federal Reserve’s delays in raising interest rates and its continued misinterpretation of inflation, monetary and fiscal policies are now complicated by the negative supply shock imposed by the invasion of Ukraine by Russia,” said Mickey Levy of Berenberg Capital Markets.
“Even without the surge in oil and commodity prices, the Fed is wrong on every count,” Levy wrote in a Wall Street Journal column, arguing that the central bank “needs to start raising rates.”
But Wilcox, now with the Peterson Institute for International Economics and Bloomberg Economics, defended the Fed’s performance, saying officials have adapted to changing circumstances.
“I think the allegation that the Fed is behind the curve is vastly overstated,” he said. “They were taken by surprise, as were the vast majority of tipsters”, but “they had the guts and the courage” to change their minds publicly.
Economists forecast six or seven rate hikes this year, which would still leave the policy rate below 2%, assuming central bankers raise it by quarter points.
However, Powell and other policymakers stressed that they would do whatever is necessary to curb inflation.
After starting to raise borrowing costs, the Fed is then expected to begin offloading its massive stockpile of assets purchased to provide liquidity to the economy during the pandemic, a process that is expected to begin this summer and continue gradually. , to avoid upsetting the financial markets.
“The most important thing for the Fed to communicate in an environment of enormous uncertainty” is to clarify “how it is going to react,” Wilcox said.