The European Central Bank (ECB) decided yesterday (Thurs. 4 February) not to take any measures for the time being to reduce the skyrocketing inflation of 5,1% in the eurozone. In the Netherlands, inflation in January is even 7,6%. In a conversation with Eric de Lijster, Edin Mujagić, chief economist at OHV Asset Management, analyzes the background to the exceptionally high inflation and gives his expectations for the coming months. What should entrepreneurs take into account? In this article, Mujagić analyzes the Fed's policy.
The side wheels can be removed. That's at the heart of Fed chairman Jerome Powell's press conference after the bank's interest rate committee meeting. The US economy is now strong enough and no longer needs the high level of support it had in recent years to continue growing. The Fed is therefore adapting to the changing and changing economic environment.
The Fed sees from the labor market that the US economy is strong enough. According to Powell, it is very strong, with hundreds of thousands of new jobs added every month and the unemployment rate that is now below 4%. The labor market is so strong, Powell said, that it can have higher interest rates. According to the chief executive of the central bank in Washington, "There is quite a bit of room to raise interest rates without the labor market suffering." In other words: the planned 3 or even 4 rate hikes that the Fed plans to implement this year can continue as usual. In fact, Powell did not rule out the possibility that the bank could raise official interest rates every meeting this year - there are still 7 to go -. This means that, unlike in previous years, there will be no insignificant Fed meetings this year.
Green light for interest rate hikes
Ensuring maximum employment, or a well-functioning labor market, is one of the tasks of the Fed. In that part of the bank's mandate, the green light is on for rate hikes. The second part of the Fed's job is to keep inflation low, which the bank defines as 2% depreciation per year. When Powell said inflation is clearly higher, he wasn't saying anything new. Even the birds of the skies in the US know that prices haven't climbed as hard in decades as they have in recent months. That Powell indicated that the temporary factors driving this are stronger and longer-lasting than previously expected, that inflation is more widely supported than by high energy prices alone and that the risk that inflation will not only be too high for longer but could climb even further , was a multiple underlining fears the bank will fail on its second term if it doesn't act. In other words: in this area too, the green light is in favor of interest rate hikes.
The Fed's determination to turn its monetary policy around was evident in a number of additional items. That was the tone of the press conference. The main focus was on the risks of inflation being too high for too long and above the Fed's target rate in the medium term. In addition, Powell highlighted the differences between 2022 and 2015, the year the Fed last started raising interest rates and had to rush to reverse them after some time. Mainly because stock prices fell, threatening financial instability.
Financial markets react nervously
In recent days, the financial markets have again reacted nervously to the Fed's plans, but the bank does not seem to be paying much attention to that for the time being. Powell said during the press conference that the bank is watching the real economy. For the good listener, that detail was a telling message. When economists talk about real economy, they are talking about the total economy minus the financial sector and markets. Apparently, the Fed believes that US households are more weatherproof today than they were then and sees the recent market jitters as nothing more than the adjustment of the markets to the Fed's new stance.
2022 will be the year in which we will gradually loosen very loose monetary policy, Powell said, adding that monetary policy will eventually move from loose to tight. He struck a very realistic tone. The Fed must, in his words, be "humble, flexible and modest" because the uncertainty facing the bank is great.
Inflation is bad
And to make it clear to everyone how the Fed sees the current high inflation, Powell said, "inflation is bad." I know central banks and central bankers who just can't get over that, where humility and modesty are hard to find and who are fairly confident in their assessments in this above-average uncertain world. I'm not naming names, but because I Hints a fun game find: three words, the river Main flows through the city where this central bank is housed.
As for the Fed's plans, by the way, I'm yet to see what actually happens. There are too many known risks—not to mention unknowns—that could thwart Powell's plans.
