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Low inflation rates are persistently obscuring stronger US growth and are generating debate within the Federal Reserve as to whether it may be necessary to lower interest rates in the United States. instead of increasing them.
The US central bank, led by chairman Jay Powell, is expected to maintain its policy unchanged at between 2.25% and 2.5% at its meeting on Tuesday and Wednesday. While US activity improved after a fragile start to the year and as foreign risks dwindled, many analysts remain confident that the Fed will maintain its strengths. rate at their current level for the rest of the year.
But policymakers, including Charles Evans, of the Chicago Fed, have opened the door for future discussions on whether the central bank could lower rates if inflation disappoints more or if growth deteriorates further. unexpected way. Richard Clarida, the vice-president of the Fed, said this month in an interview with CNBC that in 1995 and 1998, the central bank had subscribed to "cuts in the insurance sector" while a recession was not threatening.
Bill English, a professor at Yale University and former director of the Fed's monetary affairs division, said he did not see the compelling need for a rate cut yet. "I suppose they stick to that for a moment and let the data speak," he said.
However, he added that if the Fed concluded in the summer and autumn that inflation was lower than what it wanted and that the economy was slowing down, it might want to adopt one or two "easing measures" to see if that improved the outlook.
The United States posted strong growth on Friday, with economic growth at an annualized pace of 3.2%, which adds to the signs that a fear of growth earlier this year was overestimated. The overall figure was well above the trend of the US economy and added to the good growth in US employment and improved prospects in foreign economies, including China.
As such, some economists are struggling to understand why the Fed should abandon plans to keep rates unchanged this year and monitor future economic data for signs that inflation is finally starting to rise. At its last meeting, the Fed did nothing to exclude the possibility of a rate cut. A summary of the meeting highlighted "significant uncertainties" about the outlook and added that the rate expectations of policy makers could evolve in both directions.
But the situation is complicated by a number of factors. First, US growth figures have largely overestimated the underlying strength of the economy, according to Bob Schwartz, chief economist at Oxford Economics. A key measure of underlying private demand rose only 1.3% in Friday's Bureau d'analyze économique report, compared to 2.6% in the fourth quarter.
And the weakness of the inflation data in the report has only heightened concerns about slowing US price growth, as wage growth is firming up and Unemployment rate only rises to 3.8%. The price index of basic personal consumption spending rose 1.3 percent year-on-year in the first quarter, according to Friday's figures, less than the 1.4 percent expected on Wall Street.
Persistent weakness in inflation worries the Fed because the central bank has not managed since the Great Recession to sustainably maintain price growth at its 2% target. Bond investors, "said Schwartz," see the glass half empty, in their view the persistence of low inflation in the report is a sign that the economy may be weaker than expected. "
The last minutes of the Fed suggest that policymakers are sharply divided in the next stage. A number of officials have insisted that future rate hikes remain on the table later this year. For some, lowering rates could raise fears about the risk of fueling risk bubbles in the markets. Yet other decision makers are worried about persistent weakness in inflation expectations.
In his April 15 speech, Mr. Evans said that an acceleration of inflation of 2.25 to 2.5% would not be a major concern, given the apparent weakness of inflationary pressures. "If the activity slows more than expected, or if inflation and inflation expectations are too low, it may be necessary to leave politics aside – or maybe even loosen it – to provide the appropriate accommodations to achieve our goals, "he said.
The Chicago Fed president is particularly worried about underlying inflation of 1.5%, saying the inflation rate would justify a decision that is too restrictive.
Mr Clarida had said a few days earlier that he did not see a recession in the horizon, but that, historically, the Fed had not needed to identify an impending slump before to lower the rates. "If you look at the history of the Fed, it has happened that the Fed, in the 90s, removes some cuts in the insurance sector. We saw it in 1995. We saw it in 1998. So the rate cuts are not always associated with the recession. "
US President Donald Trump's public rate cuts are making the Fed's deliberations even more painful. The central bank does not want to appear to insult Mr. Trump's policy of easing, given the determination with which it preserves its independence. The Fed also does not want to panic markets by appearing excessively dovish.
"Fed officials are likely to be worried about downside interest rate risks or edgy markets, which could confuse a decline in response to low inflation with a major concern for growth prospects," said in a statement. recent release Note.
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