If there are 10 steps to raising interest rates in the U.S., yesterday Federal Reserve Chairman Jerome Powell took the first step in that direction. And he was not alone, a number of US Federal Reserve members, who are beginning to look at a retreat from the ultra-expansionary monetary policy, are climbing. Provide expectations for a number of interest rate hikes.
However, choosing the direction of interest rates does not signal the end of the Fed’s dilemmas. On the one hand, it is not easy to talk about raising interest rates while the economy still needs time to recover from the crisis. But on the other hand, the Fed also knows that the chestnuts need to be “removed from the fire” before the warming of the economy gets out of control.
Be careful with inflation
While Powell did not hesitate to make interest rate forecasts, he was cautious about inflation.
The crisis began with a forced halt in demand and led to disruptions in the world supply side, which led to rising commodity prices and transport tariffs. This problem is still knocking on Chinese ports, which are trying to fight the jump in commodity prices by restrictions, so the Fed has approached inflation cautiously.
But the Fed is not worried about inflation. The Bank raised its short-term inflation forecast but left the long-term forecast almost unchanged, indicating that it sees inflation as stemming from global supply disruptions in the face of the corona crisis, and in its long-term estimate it will moderate.
The Fed also addressed the US labor market yesterday, which suffers from a shortage of workers as a result of decisions made in the days of the Corona. The Fed chairman complimented him and expects him to recover despite last week’s downfall. As in the Israeli market, there is a demand for workers in the US as well. Of people receiving assistance.
And what about bond purchases?
One important word was not in the announcement: Tapering, meaning reducing the volume of bond purchases. So the quantitative easing program continues as it is, for now, but it can already be said officially that the Fed is changing the tone of the ultra-expansionary policy that characterized the Corona crisis.
In the end, keep in mind that the Fed does not like shocks. Chairman Jerome Powell had to send the message that the policy is going to change sometime, but it will not happen tomorrow. In the meantime, the incentives have remained as they are.