In its new forecast that there will be two interest rate hikes in 2023, the US Federal Reserve (FRS) gave the first signs on Wednesday that a shift in its monetary policy may now be close. It is the first of the world’s great powers’ monetary authorities to step up pressure on the European Central Bank to quickly determine its incentive-withdrawal strategy.
At the end of a two-day meeting of the Fed’s monetary policy committee, Jerome Powell, the agency’s president, made a prudent speech reaffirming his commitment to maintaining the central bank’s support. given to the economy through very low interest rates and $ 120 billion in monthly asset purchases.
However, for the first time, there were turning signals that were immediately perceived with dismay in the markets. After announcing earlier this year that inside the Fed they were not even “talking about talking” about lifting stimulus, Jerome Powell now said that this week’s meeting did exactly what was done: “Let’s talk about talking.”
Moreover, forecasts of future Fed interest rate decisions that are regularly posted by its members currently forecast two rate hikes during 2023, indicating a changing environment for policy behavior within the monetary authority.
These signs of change in the Fed are emerging at a time when the US economy is experiencing escalating inflation. Annual price change in the United States rose to 5% in May, and the Fed is now forecasting inflation to average 3.5% by 2021, clearly above the 2% target it has set for itself.
So far, Federal Reserve officials have not dramatized this price increase, stressing that much of it is caused by temporary factors. And they made it clear that the main concern at this stage remains the Fed’s other goal of maintaining high employment levels, making it clear that exceeding the inflation target is not a big concern.
Yet, when economists like Lawrence Summers warn of the risks of overheating from the crisis, more and more markets are betting that the Fed will have to change course sooner than expected. And, as usual, any signal in this direction, for example on this Wednesday, leads to an increase in interest rates on government debt and a decrease in the value of shares.
The main concern is that the 2013 scenario, in which a surprise announcement by then Fed Chairman Ben Bernanke, led to a scenario of market volatility with implications for all corners of the globe, is being repeated. This time, Jerome Powell does not want to repeat the mistake of his predecessor and tries to manage the removal of irritants as gradually as possible.
In the euro area, these moves could have an important impact on the direction in which the ECB will pursue its own monetary policy. The sign that the US will start raising rates faster than expected is increasing pressure on Christine Lagarde and her colleagues to change course as well. Inflation in Europe is not that high, but it has also been rising in recent months (partly due to temporary factors). In the case of the euro area, additional pressure could come from countries where inflation growth and concerns about it may be more significant.
