Last week, the US central bank, the Federal Reserve, or simply the Fed, decided to start the process of raising interest rates. It raised the rate from a range of zero to 0.25% to between 0.25% and 0.50%.
Everything indicates that the interest rate hike will continue for the remaining seven meetings this year and as many next year.
Interest rates go up because inflation is very high there. Their IPCA closed February at 7.9% in 12 months. In the last three months, inflation ran at 8.3%, already annualizing the rate. That is, there is additional inflationary pressure.
Inflation measures that are less sensitive to the various price shocks that have occurred for at least seven quarters also indicate very strong inflation. These less shock-sensitive measures are called cores. The various cores have been running between 4.5% and 6.5%. When we consider the last three months, the numbers range from 6% to 7%, that is, higher than the numbers in 12 months, which signals greater inflationary pressures ahead.
Services, excluding energy, run at 4.4% in 12 months, also above the 2% target.
The job market numbers have been surprising for the better. In the last 12 months, just under 7.5 million jobs were created. If the pace continues over the next few months, in about eight months or so, the job market will be as tight as it was in February 2020, just before the coronavirus epidemic hit the United States. It was a general opinion that at that point there was full employment.
Other indicators show a very strong labor market as well. For example, for every worker looking for a job, there are 1.7 job vacancies “looking for” a worker.
As Fed Chair Jerome Powell put it, “This is a very, very tight job market at an unhealthy level.”
If it is true that inflation has risen due to an incredible set of supply shocks that have hit the United States —and Brazil as well— for seven quarters, the spread of the inflationary process and the high inflation of services and cores, in association with the job market with no slack, are signs that the inflationary process is acquiring some inertia.
Wages have gone up, although they still can’t keep up with inflation. Nevertheless, the best measure for wages, constructed by the Atlanta Fed, suggests that wages are already up to 6.5%, with big acceleration at the margin.
A process of spiraling prices and wages begins, albeit slowly.
According to the projections of the Fed board, a soft landing scenario for inflation is still possible. That is, that the reversal of the shock and a slight increase in interest rates to neutral are enough to land the economy in 2024 with inflation on target, full employment and growth close to potential.
I think the chances of a soft landing are slim. The inflationary process shows signs of creating a life of its own.
Jerome Powell was asked at the end of his press conference, after the announcement of the decision of the monetary policy committee (FOMC in its acronym in English), whether he considered the Fed to be late in the monetary cycle. He replied that if he had known back then that things would turn out the way they did, the interest would be much higher today.
I won’t be surprised if there is an acceleration in the pace of interest rate hikes in the United States.
I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
