April 23, 2021

The Federal Reserve of the USA prepares the land to raise rates in December | Economy

The Federal Reserve of the USA prepares the land to raise rates in December | Economy

The Federal Reserve chose to leave the interest rates intact between 2% and 2.25%. It was expected on Wall Street, after the quarter-point increase that It was decided in September. This meeting of the central bank of the United States, which coincided with the digestion of the result of legislative elections, served to pave the way to once again raise the price of money in December despite political pressure and recent market volatility.

The focus was on the language of the statement to look for clues. Any change in the wording could have an effect on market expectations. The 10-year bond rate was above 3.2% before the decision. In his analysis of the economy, he confirms that both the expansion and the conditions in the labor market are robust. He points out, however, that the investment moderated, which could be attributed to the uncertainty generated by the tariff battle.

The accommodative term was removed from the statement in September, because it was considered then that interest rates are already in an area that does not stimulate the economy as in the past although the current strategy continues to support. Yes it is again insisted that the rate hike will be "gradual", consistent with economic activity and that the risks are "balanced". The Fed, therefore, feels comfortable at this time with its strategy.

The latest internal survey indicated that four more rate increases would be necessary to bring them to a neutral level. One would be decided at the next meeting in December and at least two more would arrive throughout 2019. There is one more as possible in 2020, but several members of the central bank indicated that it would be convenient to reexamine the current strategy when it reaches 3% . The evolution of economic indicators will be key.

The rate of unemployment remains at 3.7%, the lowest level in almost half a century, since the Vietnam War, and economic activity is on track to close the year advancing about 3% on average. Consumption is robust and inflation is contained near the 2% reference level. That allows the Fed to move forward with the plan, despite the harsh criticism of President Donald Trump with the strategy of the institution directed by Jerome Powell.

This meeting is the last without a press conference by Jerome Powell. The president of the Fed will appear as of December before the media after each meeting to explain the decision of the committee. Until now, he did it with a quarterly rate, which allowed him to anticipate his movements. That predictability is lost because the normalization process of monetary policy is nearing its end.

Communication was crucial to preserve stability after the financial crisis, a decade ago. Wall Street remained on this Thursday on the expectation, after tracing its indexes with solidity the day after the elections. The Fed, in parallel, has to show that it is not allowed to influence the search for a difficult equilibrium that prevents the economy from overheating or curbing excessively. The increase in December will be the fourth this year.


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