In the US, the key rate was raised to 0.7-1.0 percent. They were forced by record-breaking prices that have not been seen by Americans since the 1980s. Gasoline and electricity are especially hit on the pockets. About whether the country’s monetary authorities will be able to curb inflation – in the material of RIA Novosti.
Went up for promotion
The US Federal Reserve System (FRS) raised the rate for the second time in a row. And immediately by 50 basis points – for the first time since May 2000.
Usually the American regulator is very cautious, for which this department is often criticized.
But accelerated inflation forced to cut to the quick. In March – 8.5 percent, acc-ording to the US Depart-ment of Labor. In February it was 7.9. The price of petrol has gone up the most. Accordingly, transport costs have increased.
Prices for fast food, bel-oved by Americans, have skyrocketed. Electricity and rent are not far behind.
It’s all about Russia’s military operation in Ukraine, justifies President Joe Biden. “Seventy percent of inflation is due to Putin’s increase in gasoline prices,” he assures.
In fact, goods in the US have been rising in price since last year, The Wall Street Journal points out. This is the result of “excessive federal spending and loose monetary policy.”
The Fed has been saying throughout 2021 that record inflation is short-lived. But in fact, they overslept the moment when it was necessary to take urgent measures. “We should have acted sooner,” admitted the head of the department, Jerome Powell.
The sluggishness of the monetary authorities turned into an increase in unemployment: in April – more than six percent. At the same time, in the first quarter, GDP fell by almost one and a half percent in annual terms, according to preliminary data from the Ministry of Commerce. “This is a consequence of an increase in imports and a slow replenishment of stocks – the trade deficit has increased. Restrictions in China due to the pandemic also had a negative effect,” explains Vladislav Antonov, a financial analyst at BitRiver.
Under such conditions, the key rate had to be sharply raised.
However, this was expected, and the market reacted positively. As a result of trading on Wednesday, US stock indices are in positive territory. For example, the S&P gained almost three percent. The increase was included in the price in advance, the RIA Novosti interlocutor notes.
The dollar, by contrast, weakened by more than 0.65 percent against both the euro and the Japanese yen.
“The regulator continues to tighten monetary policy, which began in March. Jerome Powell said that at the next meetings they will consider another increase of 50 basis points in one step. Most likely up to two or three percent. Then they will take a pause to assess the impact on inflation, consumption,” says Mikhail Kogan, Head of Analytical Research at the Graduate School of Financial Management.
Some analysts do not rule out an increase of 75 points. There is an ardent supporter of this in the leadership of the Fed: the head of the Federal Reserve Bank of St. Louis, James Bullard. Calls to raise the rate to 3-3.25 percent by the end of the year.
That may not work, however, warns Fedor Sidorov, founder of the School of Practical Investing. A crisis is brewing in the US economy. Energy carriers, products of the agro-industrial complex are getting more expensive. The logistics and production chains disrupted during the pandemic have not yet recovered. “To curb inflation, we need a rate of six to seven percent. But the Americans cannot afford this. The public debt is too high: already $30.4 trillion. It is becoming more and more difficult for the government to pay interest to foreign creditors,” the expert points out.
Therefore, prices will continue to rise, analysts say. The US economy will move to stagflation – rising inflation and unemployment with a simultaneous decrease in GDP.
Get rid of extra money
Starting June 1, the Fed will also start selling mortgage and Treasury bonds at $17.5 billion and $30 billion, respectively. The plans are to increase it to 35 and 60 billion in autumn.
Over the year, the regulator’s balance sheet will decrease by about a trillion dollars. Now it has almost nine trillion.
Monetary authorities want to remove “extra” liquidity from the market and thereby slow down price growth.
Since March 2020, trillions have been poured into the economy – they stimulated entrepreneurial activity during the pandemic. And at a near-zero rate.
“Now the Fed is trying to blow off the “bubble” in the stock market, which led to record inflation. It is necessary to sell securities carefully so as not to cause a massive dumping of bonds by funds and other central banks,” says Vladislav Antonov.
The tightening of US monetary policy means the beginning of a global financial and economic crisis, analysts say.
Investors do not believe in economic recovery. Get rid of stocks, bonds and so on, preferring to invest in the least risky assets – gold and cash. This, in turn, hits the stock markets around the world, Fedor Sidorov explains.
The first and only time the US regulator applied quantitative tightening was in 2017-2019. But then the assets from the Fed’s balance sheet were sold more slowly: they started from ten billion a month and increased to 50 during the year.
By the way, in the fall of 2018, the S&P 500 fell by 20 percent. The panic in the market was stopped – Powell refused to normalize monetary policy in favor of the capitalization of US indices. This time the trick will not work because of record inflation.
In the coming months, it will accelerate further – along the chain in all countries, experts believe. In Lithuania already more than 15.5 percent, in Germany – 7.3, the maximum for 40 years.
And the real incomes of the population will fall. The result: a full-blown and protracted recession.
The global economy has not yet had time to recover from the coronacrisis, and now tough anti-Russian sanctions have added fuel to the fire due to a special operation in Ukraine. Oil and gas quotes are at a record level. Production, transport, and, ultimately, goods on store shelves are becoming more expensive. And raising the key rate is unlikely to help break out of this vicious circle.