(Washington) The American central bank is preparing its weapons to act against inflation which has defied all forecasts by rising in the United States to its highest level since 1982, and whose trajectory for 2022 is dividing economists.
Posted at 2:33 p.m.
Updated at 7:58 p.m.
“I am very concerned about the high level of inflation,” said Lael Brainard, the future vice-president of the American central bank (Fed), on Thursday during a hearing before the Senate Banking Committee.
“We hear from working families across the country talking about inflation […]. We have a powerful tool and we will use it,” she said.
Faced with prices that have climbed 7% in 2021, their biggest increase in nearly 40 years, the powerful Federal Reserve is therefore on a war footing.
Its weapon: key rates, which it is preparing to raise faster than expected, probably as early as March. The objective: to increase the cost of credit, and, in turn, to reduce consumption.
“We have a tool that acts on demand, which is the key rate,” said the future number 2 of the Fed, who is due to take office in February.
But the exercise is delicate, because hitting too hard could weigh on employment.
Mme Brainard expressed confidence that the actions the Fed will take “will reduce inflation while continuing to allow the labor market to return to full strength over time. We will therefore find full employment while bringing inflation down to 2%.
Increase of 0.25 point in March
“Inflation has been stronger and for longer than any of us thought,” Fed Governor Christopher Waller told Bloomberg TV on Thursday evening.
“Inflationary pressures will ease in the second half of this year,” he added, still expecting around 2.5% by the end of the year.
Key rates had been lowered within a range of 0 to 0.25% in March 2020, in the face of the COVID-19 pandemic.
Mr. Waller thus said he was “favorable” to a first rate hike in March, of 0.25 points, but no more, because “we have not prepared the markets for something so dramatic. […] If inflation doesn’t seem to be coming down, that would definitely be in the toolbox, but we would need a lot of it.”
He then anticipates three increases in 2022, but, if inflation in the second half of the year “continues to be high, we could have four or five increases”. On the other hand, “if inflation falls back in the second half of the year, as many of us anticipate, as some supply chain issues are resolved, then there may be a pause.”
Other economists, however, are less optimistic: “I expect inflation to remain high this year, perhaps even more than in 2021,” warned Jason Furman, former economic adviser to the president, on Thursday. Barack Obama and professor at Harvard, in a column published by the Wall Street Journal.
“Bidenflation”
Inflation has also become a major concern for business leaders, who are worried that it will persist beyond 2022, according to a survey published Thursday by the Conference Board economic research center.
Although the central bank can act on consumer demand, it does not have any leverage on the other origin of the price increase: supply, i.e. disturbances in the global supply chain.
They did not resolve as many analysts predicted, and may even be increased by the Omicron variant.
In the United States, this phenomenon is reinforced by labor shortages which are slowing down production and deliveries, further limiting supply.
Opposite, demand is very strong, thanks to government financial aid in the face of the pandemic, but also to the fortunes of property owners and holders of equity portfolios which have grown, with the rise in the prices of these assets.
This soaring cost of living is one of the many thorns in Joe Biden’s side, and the Republican opposition does not fail to attribute the blame to him, now nicknaming the rise in prices, “Bidenflation”.
To act on the offer, the White House must announce new measures to reduce congestion in American ports.