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Hesitant investors have hesitated between celebrating the expected economic recovery in the United States and biting their nails on a possible price spiral, but the Federal Reserve is firmly committed to keeping interest rates low.
In the balance between enabling faster growth – and rising prices – to restore some of the more than nine million jobs still missing due to the Covid-19 pandemic, the message from Fed Chairman Jerome Powell, has been clear: he wants to know more people go back to work.
Analysts expect the Fed’s Federal Open Market Committee (FOMC) to maintain its very “dovish” stance during its two-day policy meeting next week.
Powell is expected to stress once again on Wednesday that the Fed is ready to accept higher inflation to return to full employment, a target that took a decade to achieve after the 2008 global financial crisis.
“I think it’s ‘the markets be damned’ at this point,” said Robert Frick of the Navy Federal Credit Union.
Read | Fear of inflation lurks, even as officials say don’t worry
“The Fed has said that until there is real improvement in jobs and the economy, they will not budge,” Frick told AFP. “I really don’t think they’re going to waver.”
From an unemployment level of 3.5% in 50 years before the pandemic lockdowns began in early 2020, the unemployment rate soared when millions of workers were sent home, but gradually fell back to 6 , 2% in February amid business reopening.
As vaccine deployments accelerated and President Joe Biden signed a massive $ 1.9 trillion stimulus package, raising the odds of the world’s largest economy soon reopening, investors began to fear. an inflationary spiral.
This is reflected in soaring government debt yields, particularly on 10-year Treasuries, a canary in the coal mine for price hikes to come.
While the return to its early 2020 level can be seen as a kind of market panic, there are real consequences to rising Treasury bill yields, as mortgage and auto loan rates are tied to it. .
Mortgage rates have started to climb, which could pull some buyers out of an already hot real estate market, while existing homeowners will have a harder time refinancing their loans, said Kathy Bostjancic of Oxford Economics.
Inflation is expected to rebound as the economic engine returns, especially compared to depressed prices seen when the pandemic closed, but any sharp rise is expected to be temporary.
“The reopening of the economy will be boosted by this $ 1.9 trillion fiscal stimulus, so there is no doubt” that inflation will rise, Bostjancic told AFP.
The crucial question is how high “and for how long,” she said.
“It’s going to get hotter, but we don’t think it’s an overheating situation.”
In more than a decade, inflation has rarely exceeded the Fed’s 2% target, and the central bank’s preferred price measure only rose 1.5% in January from a year ago earlier.
Bostjancic and Frick agree with many economists who say that there is a lot of downturn in the economy that will moderate price increases.
Powell acknowledged that prices would rise, but he vowed that the Fed would not withdraw the stimulus until the economy returned to peak employment – which is unlikely this year – and the inflation was both above the 2.0% target and on track to stay there “for a while.”
“We don’t intend to raise interest rates until we see these conditions met,” Powell said.
However, the Fed is not immune to market nervousness and Powell could try again to calm inflation fears by sending a stronger signal that the central bank will use its tools to deal with any worrying price increases. or any surge in bond yields.
While he hasn’t committed to the details, he could provide more details at his press conference on Wednesday, including his willingness to change the mix of debt the Fed buys each month.
And Bostjancic notes that the Fed could make another technical move that could ease the pressure on yields, by extending the pandemic exemption on banks holding Treasuries without having to have a cash cushion.
This exemption expires at the end of the month.
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