The fight against inflation is tougher and longer than expected. The US Federal Reserve now subscribes to a key rate scenario above 5%.
“Inflation data recorded so far for October and November show a welcome slowdown in price growth. But it will take much more evidence for inflation to be considered on an easing trend,” Federal Reserve (Fed) Chairman Jerome Powell said on Wednesday, according to comments collected by the ‘Agency
France-Presse.
As expected, the Fed added 50 basis points to its key rate to place it now in a range of 4.25 to 4.5%. Cumulatively, we are talking about an increase of 425 basis points in seven consecutive increases this year. In its forecasts, the American central bank presents a median scenario placing this rate at 5.1% next year, against 4.6% in its September forecasts. It should rise to 4.1% the following year and then to 3.1% in 2025, aiming for a long-term trend of 2.5%.
This does not prevent the institution from revising upwards the expected growth rate of inflation according to its benchmark indicator, the PCE (or personal consumption expenditure, in French). The expected increase in 2023 increases to 3.1% (compared to 2.8% in the September forecast). Only to return to around 2.1% in 2025. As for the recession, “I don’t think anyone knows whether or not there will be a recession,” Powell said. Nevertheless, the Fed is adjusting GDP growth sharply downwards, now expected around 0.5% next year, much less than the 1.2% expected in September. And revises slightly upwards the unemployment rate for next year, to 4.6%, against 4.4%.
Remember that on this side of the border, the Bank of Canada foresees that economic growth “will essentially stagnate until the end of the year and during the first half of 2023”. She sees GDP growth ranging between 0% and 0.5% through the end of 2022 and the first half of 2023. slightly below zero than being slightly positive,” reads the Monetary Policy Report.
So much for the use of the word “recession” in the vocabulary of central banks.
However, we are more advanced than in the south, as the Canadian economy is highly sensitive to the vagaries of interest rates given the high level of household debt and the exuberance of the real estate market in the wake of the pandemic. In a presentation to the Business Council of British Columbia on Monday, central bank governor Tiff Macklem insisted that domestic demand was slowing. “We expect GDP growth to be close to zero through the middle of 2023 as the economy adjusts to higher interest rates. This will ease domestic price pressures and inflation will decline. […] Interest rate hikes are starting to show results, but it will take time before they produce their effects on the whole economy,” he stressed.
Review the 2% target?
In this presentation, Mr. Macklem discussed the possibility of a break with the past, even a paradigm shift in the face of inflation. He returned to the disinflationary forces that had dominated the two decades preceding 2020. Globalization, relocation of production chains to countries with a large pool of low-wage labor, technological progress stimulating productivity gains across the globe, etc “All of these changes on the supply side ushered in a period of solid growth, low inflation and low interest rates. But these forces are changing. »
The pandemic and geopolitical instability are fueling a movement to relocate supply chains. In addition, “the inadequate sharing of the benefits of growth feeds the populism which today pushes countries into withdrawal. Support for globalization is stalling or even declining, and productivity growth is tending to decline”. Added to this is a structural labor shortage that is exerting upward pressure on wages here and there. In short, production costs are bound to increase without compensating productivity gains.
“Bringing inflation back to the 2% target is our main objective. But the world has changed a lot in 30 years. With heightened geopolitical tensions and, in some regions, anti-globalization sentiment, it will be more difficult to get inflation back on target and stay there,” Macklem acknowledged.
In an email exchange, a reader of the To have to held that with the erosion or even disappearance of these disinflationary forces, the 2% inflation target adopted by the central banks will have to be revised upwards if we want to avoid a long economic stagnation, says -he. Olivier Blanchard, who was chief economist of the International Monetary Fund from 2008 to 2015, made the same suggestion in an op-ed piece published in late November in the FinancialTimes. “When in 2023 or 2024, inflation falls back to 3%, there will be an intense debate about whether it is still worth going back to 2%”, at the risk of penalizing the economy, he suggests. -he.