The Fed raises interest rates by 0.50 points and lowers the balance sheet

Flexible budget cut

In the meantime, the budget reduction maneuver will remain flexible, in order to ensure a large level of reserves, and thus avoid problems similar to those that have previously generated quantitative tightening: The speed can then be slowed down or braked if necessary. Also because, the Fed remembers, when the cut in purchases stops, central bank reserves will continue to fall, reflecting the growth in balance sheet liabilities.

centrality of uncertainty

Uncertainty remains the mainstay of the current situation. Powell said the Fed is aware of this, but above all it will “strive to avoid adding further uncertainty to these unusually difficult and uncertain times.” He did not submit one forward steering Kamel, letting the data guide his policy, but nonetheless set out to give some indications about his future moves. “It is a very difficult situation forward steering Before 60-90 days, there are a lot of things that can happen in the economy and in the world,” Powell said.

The neutral level of interest rates

How high can prices go? Noting that the measures are indirect and uncertain, Powell pointed to the neutral level of the cost of money at 2-3% (but in an economy where full employment and inflation are running at a 2% target). He added that the Fed now aims to raise rates quickly by looking at financial conditions (and thus the entire monetary policy transmission chain), to verify that they are also moving in the same direction, and then the economy as a whole. To assess whether it is on the road to price stability. “If this path is to lead to higher levels of the neutral rate estimates, we will not hesitate to get to those levels,” Powell added, and thus did not rule out a restrictive stance.

Federal Reserve bet

The Fed hopes to be able to slow demand in the labor market, in order to balance supply and demand, without limiting economic activity excessively – which is also hampered by reduced fiscal stimulus – and thus growth. Restoring equilibrium, he said, “would give us the ability to get lower wages and lower inflation without having to slow the economy and experience stagnation and a marked rise in unemployment.”

hard soft landing

It is a soft landing scenario, which is based on strong consumer demand, backed by additional savings accumulated during the pandemic, and massive investment. However, the Fed does not hide the difficulties of the process, which “involves higher rates: in mortgages, in loans. It won’t be fun, but in the end, everyone will be better off, especially those on fixed incomes and those who live at the lower end of the income distribution,” Powell recalls.

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