“You can only go to dinner once in the evening, but many people will be able to go to dinner.” Thus Jerome Powell, president of the Fed, during the press conference following the decision of the FOMC – the monetary policy arm of the Federal Reserve – to leave rates close to zero.
Powell said the Fed is considering what will happen when the US economy fully reopens, thanks to the herd immunity that will be achieved with anti-Covid vaccinations.
The reopening and the end of the lockdown will be such that, initially, in his opinion, companies will not be able to meet all the demand, which will come from the American consumer audience.
This phenomenon, explained the number one of the American central bank, will cause a relatively modest increase in inflation, “an extraordinary increase in prices”, which however will not change the inflation trend in the States by much. In the months of March and April, there will therefore be a “significant jump” in inflation on an annual basis – considering the very low levels of last year – but inflationary pressures will then tend to subside.
It should be noted that Jerome Powell’s Fed has significantly revised upward the outlook on the US inflation rate of 2021, to 2.4%, well above the 1.8% previously expected. Inflation represented by the PCE core index is also expected at 2.2% in 2021, against the + 1.8% expected at the December meeting. However, core PCE inflation is expected to slow down to 2% for 2022 and 2.1% for 2023.
In leaving interest rates close to zero, the US central bank also updated its growth estimates on US GDP: it now expects the economy to expand by 6.5% in 2021, compared to the + 4.2% expected in the meeting. of December 2020. The estimates of the US GDP for 2020 have also been revised upwards, from the + 3.2% previously expected to the growth rate of 3.3%.
That said, from the dot plot – the document in which Fed officials indicate what levels they believe interest rates will test in the short, medium and long term each quarter – it emerges that most FOMC exponents expects rates to remain at current levels, around zero, through 2023 and throughout 2023.