The Fed announces the turning point. After years of pandemic characterized by an ultra-expansionary monetary policy, the American central bank is paving the way for its first interest rate hike since 2018: it will arrive in March, when the process of reducing asset purchases will be closed, and will be used for fight inflation that gallops well above the 2% target. Wall Street welcomes the announcement with an initial rally, which oil is taking advantage of with the WTI rising by 2% and Brent revising $ 90 a barrel for the first time since 2014.
The sprint of the lists, however, loses momentum with the press conference of Jerome Powell. The decisions of the central bank came with the stock exchanges of the Old Continent already closed. The European financial markets have closed the day of waiting with sustained gains without allowing themselves to be influenced by the downward revision of the estimates of the German economy in 2022 to + 3.6%. Milan closed up by 2.27% despite a BTP-Bund spread increasing to over 140 points, affected by the uncertainty surrounding the election of the President of the Republic. “With inflation well above 2% and a strong labor market, the Fed expects it will be appropriate in the short term” to raise rates, reads the final statement released at the end of the two-day meeting, during which the Fed left the cost of money unchanged between 0 and 0.25%. In its new hawkish guise, the American central bank dwells, without going into detail, on the reduction of its balance sheet, which has skyrocketed to 9 trillion dollars.
The process – he explains in general – will start after the rise in interest rates and will be «predictable. We will provide more information at the appropriate time ”on how the Fed intends to move in the reduction, explains Jerome Powell noting how the balance sheet is much larger than in the past, and also includes shorter-term securities. “We could move sooner and faster than in the past,” he adds repeatedly.
“The Fed will take at least one meeting after the first rate hike to decide on the budget,” he explains in what appears to be confirmation of analysts’ estimated timing of a start already in the summer. The process of reducing the budget, however, worries the financial markets. According to Deutsche Bank economists, if the Fed were to reduce its balance sheet by $ 1.5 trillion between the summer and the end of next year, the effect could be about three quarter-point rate hikes. While admitting persistent risks on the outlook that prevent predicting the path that monetary policy will follow, Powell speaks of a solid economy and labor market, with even the sectors most affected by Covid improving.
In this context, the Fed president therefore confirms the hypothesis of a tightening in March and assures that the Fed will use all the tools available to fight inflation, whose pace is expected to slow down during the year. The price rush – adds Powell – worries the Fed and is one of the risks that weigh on the economy together with Covid. A mix, he adds, that could slow growth and the labor market, which is currently very solid. Against this backdrop of uncertainty, Powell admits that the Fed’s monetary policy must be flexible and adapt to the changing environment. It has to be “humble” because, unlike many other crises, there is now no script to follow.