Lhe financial markets love the press conferences of the chairman of the American Federal Reserve (Fed), Jerome Powell, his sincere modesty, his reassuring answers and his tempered optimism, which lead to a fireworks display on Wall Street, as was the case, Wednesday, May 4, after the Fed raised its key rates by half a point, a first since the year 2000, but ruled out an increase of 0.75 points.
And then, the night bringing advice, some of the operators reflected, wondering if they had not been poisoned by the president of the central bank. This is how after the party came the thaw on the financial markets, the worst since the upheavals of the Covid-19. Is Jerome Powell deceiving his world by giving hope for a soft landing for the American economy, when inflation is at 8.5%, its highest level since 1981? Less than Democratic President Joe Biden, who attributes inflation to Vladimir Putin and the corporate cartel, without saying a word about his excessive stimulus package voted at the wrong time, in April 2021, which flooded Americans with cash.
But Mr. Powell wants to believe in a miracle, which would allow inflation to subside on its own. He already believed in it in the fall of 2021, not reacting until it was time, when employment had returned and bottlenecks in the economy persisted. Joe Biden’s political dithering to reappoint him for a second term is undoubtedly not unrelated to this and has caused precious weeks to be lost.
Cut the cat’s tail into small pieces
A return to normal is possible, but far from certain. First, real interest rates are much too low to cool the economy: 3.1% over ten years with inflation twice as high, it’s a homeopathic dose, a placebo. Then, the crisis is not over: the price of raw materials is experiencing a respite, but that is because China is closed due to Covid-19. Within six months, it will work hard to start again, and Patrick Artus, economic adviser at the Natixis bank, foresees a new inflationary puff.
In this context, the Fed is adapting and leaking, meeting after meeting, an increasingly strict policy, but gradually. Should we suddenly announce the color, even if it means provoking a recession, as Paul Volcker did from 1979 to overcome the stagflation following the two oil shocks, or cut the cat’s tail in small pieces to prepare people’s minds?
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