Anmelden / Registrieren
With his announcement on Wednesday 16 March of the first rate hike since the end of 2018, Chair of the US Federal Reserve (the Fed), Jerome Powell, ended two years of zero interest rates. The exceptional regime of easy money rolled out to tackle COVID-19 had run its course.
With an unemployment rate of 3.8% that is expected to fall again in March, the US job market is very close to full employment. The situation is also favourable for the economy – there was robust growth of 5.7% last year and, according to the Fed, there should be a further 2.8% rise in 2022. So, it is quite natural that the US Federal Reserve should now focus on inflation. With consumer prices up 8% year-on-year – an unprecedented level last seen in the seventies – the central bank will have its work cut out to contain this phenomenon. Jerome Powell was quite clear on this issue in his exchanges with the press, stating that the Fed was ready to make full use of the tools at its disposal to avoid inflation becoming embedded at a much higher level than its target of 2% per annum, “no matter what happens”.
Ironically, the Fed is following in the footsteps of the Russian central bank, which doubled its key rate to 20% a few weeks ago! Of course, the parallel with the US Federal Reserve stops there, as the economic environment in Russia is quite different to that in the US. In any event, the Federal Reserve is taking a restrictive stance and intends to maintain this for the foreseeable future. Its members are thus preparing to raise interest rates seven times in 2022 alone.
The liquidity tap is therefore being turned off little by little, and it is reasonable to assume that as well as gradually raising its interest rates, the Fed will make a start on reducing its balance sheet in the coming months. It will gradually offload debt acquired in order to maintain extremely favourable financing terms for the US government and corporations during the healthcare crisis. It has definitely saved more than one company from certain bankruptcy in this way – remember the peak of the crisis in 2020 when it was announced that cruise companies would go under, yet the sector was actually kept afloat in extremis by the Federal Reserve. However, these asset purchases also played a part in amplifying inflation, given the incentive to take on debt that these measures represented for companies and households alike.
Hence, it is the end of free money in the US. Meanwhile, in Europe, the European Central Bank (ECB) is still sticking to its particularly favourable financing conditions, continuing with asset purchases and keeping negative key rates. But for how much longer?
Written on March 18th, 2022 by Olivier de Berranger, CIO, LFDE