Home LATEST NEWS The Fed keeps its key rates between 0 and 0.25%

The Fed keeps its key rates between 0 and 0.25%

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With inflation well above 2% and a strong labor market, the Committee [de politique monétaire], expects it will soon be appropriate to raise the target range for the rate. »

A quote from Excerpt from a press release from the US Federal Reserve

Officials of the institution have made it clear that it will end its asset purchases early March, a sine qua non for raising rates. An increase could therefore occur at its meeting scheduled for mid-March.

Policy rates had been lowered to a range of 0 to 0.25% in March 2020, when the COVID-19 pandemic spread to the United States, plunging the economy into the doldrums. The objective was to support consumption.

But now the priority is to slow inflation. By raising rates, the Fed will moderate demand.

Economic activity and employment indicators continued to strengthen, comments the Fed in its press release.

Recovery of sectors affected by the pandemic

She adds that the sectors most affected by the pandemic, including services, have improved in recent months even if they are affected by the recent sharp increase in cases of infection with the Omicron variant.

Job gains have been solid in recent months and the unemployment rate has fallen significantly, further notes the institution, one of whose two mandates is to promote full employment.

Corn supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to high levels of inflation, she says.

However, it signals a reduction in supply constraints, which should help to slow inflation.

This announcement was eagerly awaited, and the prospect of an upcoming rate hike had unscrewed European markets on Monday, while Wall Street plunged to its lowest level in months.

The publication of the Fed’s press release initially caused the NASDAQ to jump by more than 3% before tempering its reaction.

The Fed had groomed the ground at its previous meeting in mid-December, announcing that it would end its asset purchases earlier than expected, starting in March instead of June.

She had also, for the first time, ceased to call temporary this inflation which has been, for months, well above its long-term objective of 2%.

Prices have indeed climbed 7% in 2021, their fastest pace since 1982, according to the CPI index. The Fed favors another indicator of inflation, the PCE index, whose data for 2021 will be published on Friday.

Fragile growth

The Fed had so far been cautious about increases, fearing that this would slow down the economic recovery too abruptly and, by extension, the job market.

But the country has now almost returned to full employment, with the unemployment rate falling in December to 3.9%, close to its pre-crisis level (3.5%), with a labor shortage work that places employees in a position of strength in relation to employers.

However, raising rates is not without risk, since it could slow growth and the recovery of the labor market.

In addition, outside the United States, too rapid a rise in rates could penalize emerging and developing countries, whose debt is denominated in dollars, the International Monetary Fund has been warning for months.

Its chief economist, Gita Gopinath, also said she doubted that inflation would drop to 2% by the end of 2022, as Treasury Secretary Janet Yellen notably anticipates.

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