The markets are in a hurry, the Fed a little less. The conditions of the US economy, despite a vaccine balance not yet optimal, already allow us to look at the next rate hikes, and the markets are aiming for a small squeeze as early as June, with at least two other small hikes before the end of 2022. The meeting October of the Monetary Policy Committee, the FOMC, will make it possible to understand that, in all likelihood, investors are running too fast.
When the first rate hike?
The “dots” – the dots that reflect, in the graph published every three months, the intentions of individual governors on the cost of credit – pointed to only one increase in September, to 0.25-0.50%, next year ( with some uncertainty) and two-three adjustments in 2022, when the cost of official credit could reach one percent (the median of the projections. These are non-binding indications, the result of the mere aggregation of eighteen different forecasts, and will in any case be updated in December On this occasion, we will only be able to understand how the Fed interprets the trend of the economy.
The slowdown in GDP
Something has indeed changed. The gross domestic product of the third quarter appeared to slow down compared to the previous months. Don’t fool the mere comparison of rebound speeds: the US economy has already passed its pre-pandemic level, and is back in line with the long-term trend. In a sense, one might think – and it will be interested to see if the Fed shares this hypothesis – that economic activity has returned to normal.
Busy late
Is it time to normalize rates too, then? Are the markets right? It’s not for sure. The Fed does not look at GDP, except indirectly: it looks at employment, which is explicitly mentioned in its mandate. Seen from this point of view, the US economy cannot be said to have returned to normal, much less to pre-prepandemic levels. Nearly five million jobs are missing, and if we recall the attention that President Jerome Powell devotes to the many aspects of the labor market, to the unequal distribution in different racial communities, it is understood that the Fed is not yet of the all satisfied with the rebound. Productivity has increased, then – very good, of course – but employment is lagging behind.
The blaze of inflation
Inflation, of course, worries a little more. Generated as it seems – but the controversy of those who criticize double fiscal and monetary stimulus should be remembered – from supply-side bottlenecks, it should not worry the central bank, unless it also spills over to expectations. The latest data from the PCE index indicate prices rising by 4.4% with core inflation at 3.6%: the increases are therefore more generalized than during an energy price increase and could therefore alter expectations.