Financial markets were expecting a half-point interest rate hike in March, but hoped the Ukraine crisis would make the US Federal Reserve (Fed) more cautious. Its president, Jerome Powell, agreed with them on Wednesday March 2. Before Congress, he indicated that he would propose, during the March 16 meeting of his institution, a quarter-point increase in its key rates, currently just above zero. “We will avoid adding uncertainty to what is already an extraordinarily difficult and uncertain time”did he declare.
Wall Street soared in stride, with the S&P 500 index rising 2% at midday. The Ukraine crisis, however, is a bad omen, with soaring energy prices, possible disruptions in supply chains and ten-year interest rates falling to 1.84% from 2.05 % mid-February – US Treasury bonds serve as a safe haven and investors accept lower remuneration – which prevents the economy from cooling by a rise in long-term rates, increasing the cost of credit.
Mr. Powell said he was unable to assess the effects of the Ukrainian crisis. But he still hopes to achieve a soft landing for the economy, without the rise in rates causing a recession, as was the case three times after the Vietnam war and the oil shocks of the 1970s. America is waging a political battle over inflation, which reached 7.5% in January, its highest level since 1982, cutting real wages and household purchasing power in the process.
Biden insists on supply issues
Republicans accuse Joe Biden’s March 2021 stimulus package of being excessive and voted at the wrong time when the economy was already overheating, while Democrats blame corporations, accused of cartelizing the economy through their monopoly positions. Jerome Powell wanted to reconcile the two, explaining that inflation was the result of the meeting between insufficient supply and excessive demand. In the short term, however, Mr. Powell believes that it is up to monetary policy to act. “Inflation is largely a monetary phenomenon and it is our tools that can be used”he explained.
He cautiously declined to comment on the proposals reiterated the day before in Joe Biden’s State of the Union address. That evening, the US president blamed inflation on supply issues, accusing companies of pushing up their margins. “One way to fight inflation is to drive down wages and make Americans poorer. I have a better plan (…) : reduce your costs, not your wages », launched Mr. Biden. The Democratic president did not mention the responsibility of his recovery plan in the rise in prices.
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