The US central bank announced a drastic change of course that ends a long period of stimulus to the country’s economic growth, with worldwide repercussions, after nearly two years of extraordinary efforts to take care of the economy amid the consequences of the pandemic.
The institution will end in March the bond purchase program underway since the beginning of the health crisis, paving the way for three increases of 0.25 percentage point each in interest rates by the end of 2022, in order to end the implemented policies in the period.
In its statement this Wednesday (15) on the conduct of monetary policy, the Federal Reserve assessed that the pandemic left as a legacy an inflationary escalation that needs to be fought with more force, in a scenario in which world vaccination advances and countries are learning to live with the coronavirus.
At the end of a two-day meeting, the Fed’s Federal Open Market Committee, equivalent to the Copom (Monetary Policy Committee) in Brazil, kept its base interest rate at the floor of 0 to 0.25% per annum, but said predict three highs for next year. Three more increases are also projected for 2023, followed by two in 2024.
Fed officials’ projections show the benchmark interest rate would be raised to 0.90% by the end of 2022, 1.6% in 2023 and 2.1% in 2024 — moving closer but never beyond at levels that it would consider restrictive to economic activity.
“The economy no longer needs increasing amounts of monetary policy support,” Fed Chairman Jerome Powell said after the meeting. “In my opinion, we are making rapid progress towards full employment.”
The timing of the first interest rate hike in 2022, the central bank said, will depend on any further improvement in the labor market.
The Fed said the new variant of the coronavirus, Ômicron, increases uncertainty about the course of the economy and that it is unclear what its effect will be on inflation, growth or hiring. But Powell said people are “learning to live with” each wave of the virus.
One of the biggest threats that could prevent a return to a pre-pandemic job market is high inflation, Powell said, because it will “take some time” for the economy to fully heal.
“What we need is another long expansion,” he said. “This is really what it would take to get back to the kind of job market we’d like to see, and for that to happen we need to make sure we maintain price stability.”
Powell said he doesn’t see an end to the Covid-19 pandemic in the short term, making it difficult for the Fed to assess what would constitute a normal job market in such an environment.
The institution updated its economic forecasts, increasing its inflation forecast – which is currently at 4.1% – and lowering the estimate for the unemployment rate. The Fed predicts core inflation will rise to 4.4% this year, before falling to 2.6% in 2022, with the unemployment rate ending 2021 at 4.3% and next year dropping to 3.5%.
Fed officials have lowered their forecasts for economic growth but still forecast healthy expansion this year and next. The US economy is expected to grow 5.5% in 2021, compared to 5.9% in September, and another 4% in 2022.
Forecasts of higher interest rates were released along with a plan to double the pace at which the Fed withdraws or “moderates” the massive bond-buying program it implemented at the start of the pandemic. In January he will begin cutting purchases by $30bn (R$171.3bn) a month, so that the stimulus will be removed several months earlier than initially expected.
Marcos Mollica, manager of Opportunity Total, stated that interest rates should rise from May or June and that the approaching rise will increase volatility in the markets, especially in the stock market and in emerging economies.
“In the statement, the Fed removed the soft language in relation to inflation. Now, the indication is that the inflation target has already been reached and it only remains to complete the employment target to start raising interest rates. With unemployment at 4.2%, this goal is also very close to being achieved.”
João Beck, economist and partner at BRA, an accredited firm of XP Investimentos, says that the statement adopted the expected harsh tone, but that the signal that the country is managing to walk on its own two legs, without so many stimulus packages, is positive .
“Of course this will still depend on activity data in the coming quarters. But if they are positive, it means growth without being artificial and without the many distortions caused by so many stimulus packages.”
Commenting earlier on the expectation for the Fed’s decision, Mario Mesquita, chief economist at Itaú Unibanco, stated that the United States is raising interest rates in a year in a smaller magnitude than the Copom raises in a single meeting.
“The interest differential between the real and the dollar will be enough to favor exchange rate stability [em 2022]. In other words, I don’t think Copom will need to keep raising interest rates after March next year because of the Fed. Maybe it will have to continue because of inflationary pressures.”
With Reuters and Financial Times
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