First, at 2 p.m., Wednesday, January 26, there was the unsurprising press release from the American Federal Reserve (Fed, central bank), which would only increase its interest rates in March: “with inflation well above 2% and a strong labor market, the monetary policy committee [de l’institution] expects it will soon be appropriate to raise [le] federal funds rate ».
It was immediately a party on Wall Street, with the Nasdaq – the index rich in technology stocks – soaring up to 3.4% and the S&P 500 by 2.2%. Investors were convinced that with such a calming Fed, the stock market correction was over. On the CNBC economic channel, former governor of the monetary institution Robert Heller, a veteran of the Reagan years, belched at his former central banker peers: “They don’t have a backbone. The Fed needs to talk less and act more”, he railed, explaining that short-term rates should already be at 2% – they are now almost zero – and those in the long term better reflect inflation, which reached 7% in December 2021, a level unheard of for forty years.
Then, starting at 2:30 p.m., there was a press conference in Washington by Fed Chairman Jerome Powell, who with his own words showed his determination to fight inflation. Wall Street was then disillusioned. The Nasdaq, after going into the red, ended the day on a minimal increase of 0.02% while the S&P 500 fell 0.15%. The yield on ten-year rates rose from 1.77% to 1.87%, now a long way from its low of 0.5% hit in July 2020. “Dove” press conference, “Hawk” press conference, for take up the bird names that characterize the partisans of an accommodating or rigorous monetary policy.
Jerome Powell has multiplied the indications showing that he would do everything to beat inflation. First, it has not ruled out a half-point increase in its key rates at its meeting in March, while the operators are counting on a rise regulated like clockwork by a quarter of a point per meeting.
Towards monetary tightening that is no doubt more resolute
Then he reiterated that the scenario had nothing to do with the last credit crunch in 2015, during a lackluster recovery at the end of the Obama era, for three reasons: growth is now very strong – i.e. + 5.6% in 2021 against + 2.9% in 2015 according to the International Monetary Fund (IMF) –, full employment (3.8% of the active population unemployed today against 5% there seven years old), and high inflation (+7% in December 2021 against 0.7% in 2015). “We are aware that this is a very different expansion”, Mr. Powell said, citing these three criteria, “and I think those differences will likely be reflected in the policy we implement”. Clearly, a monetary tightening without doubt more resolute.
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