A punch on the table against inflation. The Federal Reserve (Fed) has made its most aggressive move in monetary policy in 22 years with a half-point rate hike, to a range of 0.75% to 1%. But the true dimension of his decision goes far beyond if one takes into account that it has been accompanied by the start of a balance reduction up to 500,000 million dollars until the end of the year. Furthermore, the governor Jerome Powell has promised that others two half-point rate hikes are “on the table” for the June and July meetings, which would place the price of money around the level of two% For this summer.
The reaction of the markets was one of euphoria and relief despite the forcefulness of the movement deployed by the central bank. The The Dow Jones, the S&P and the Nasdaq posted a coordinated move higher of more than 3%, a positive reaction that some compare to the one that occurred in March 2000, when rates were also raised and Wall Street rose. Investors positively value that Powell rule out in his comments the risk of a recessionny also the possibility of ultra-aggressive rate hikes of 75 or 100 basis points as has been speculated.
“I would say we have a good shot at a soft landing. The economy is strong and well positioned to handle tighter monetary policy. But I will say I expect this to be very challenging, it’s not going to be easy at all.”
Instead, the head of the Fed seemed to draw an optimistic and benign transition process for the markets despite the uncertainty of the economic moment. “I would say that we have a good chance of having a soft or softened landing.. I’ll give you a couple of reasons for that. One is that households and businesses are in good financial shape and there is excess saving on balance sheets. Another is that the labor market is very, very strong, so it doesn’t seem to be close to a recession,” Powell said at the post-decision press conference. “So, the economy is strong and well positioned to handle tighter monetary policy. But I will say that I expect this to be very challenging, it’s not going to be easy. It may well depend on events that are not under our control. But our job is to use our tools to try to achieve that result, ‘that’s what we’re going to do.
Powell repeatedly said that inflation was “too high” – 8.5% in March – but He promised to bend her and convinced with his words to all who were listening to him at the time: the press and the financial markets. “Inflation is too high and we understand the difficulties it is causing, and we are moving quickly to bring it down”said the banker. If it meets its forecast of two additional rate hikes in its next two meetings, the Fed will place the price of money for the dollar area at 2% at the end of July, a level that is beginning to approach the state of normalization managed by the central bank. doHow far and how long will you adopt restrictive movements in monetary policy?
“Therefore, neutral, when we talk about the rate [de inflación] neutral, we are talking about a rate that neither pushes activity rising economy nor does it slow it down. It’s a concept but It’s not something we can pinpoint.”, assured in response to that question. Economists and investors will have to pay attention to the evolution of the price indices but also to the considerations of the council of governors. “We want to see evidence that inflation is moving in a direction that gives us more comfort. We now have two months where core inflation is a bit lower, but we don’t see that as a reason to get comfortable. We really have to see that our expectations are being met, that inflation is in fact under control and it starts to go down. But again, it won’t be like we stop… We’d just go back to 25 basis point increases. [en tipos]”.
“Making monetary policy appropriate in this uncertain environment requires recognition that the economy often evolves in unexpected ways. We will strive to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain time.”
Reduce the portfolio of 9 trillion by 500,000 million
In the opinion of experts, the Fed has ignored the surprise contraction in GDP in the first quarter and go ahead with the quantitative adjustment (QT) since seeks to control inflation “with delay”, according to the team of analysts ING. “It is now ‘very vigilant’ to inflation risks. This is the first 50bp move since May 2000 and underscores the new urgency the Fed has in an environment where inflation is running at 8.5% and a Tight labor market and rising labor costs risk making inflation much stiffer than in previous cycles After all, oil and food prices may eventually fall Employee wages and benefits won’t they do”, they add James Knightly Y Padhraic Garveyof ING.
What the Fed did make clear this Wednesday is the rhythm with which it will proceed to the withdrawal of stimuli, that is, to drain the liquidity injections of the last two years in which the central bank’s balance sheet has more than doubled, to 9 trillion dollars. Under the new roadmap, the central bank will begin to let debt portfolios mature and sell assets equivalent to one maximum rate of 47,500 million dollars per month between June and Augustfor raise that amount to 95,000 million in September. The reduction will be proportional in Treasury bonds (two thirds) and mortgage debt (one third). In the accumulated vision for the remainder of 2022, the weight loss diet adds up to 500,000 million dollars, somewhat less than initially estimated by analysts.
Although Wall Street has listened to what it wanted, Powell warns that it will not be a bed of roses and once again he showed humility in the face of the situation of extreme volatility that the economy is facing. The Fed highlighted in its statement that the war of Ukraine they have been joined by the effects of the new massive confinements in China and both forces are once again undermining the damaged global supply chain in multiple sectors. “Making monetary policy appropriate in this uncertain environment requires recognition that the economy often evolves unexpectedly, inflation has obviously surprised to the upside over the last year and more surprises could be expected. Therefore, we will need to be agile to respond to incoming data and the evolving landscape. We will strive to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain time,” Powell warned.