United states: the Fed should wait before its next turn of the screw

The monetary Committee of the u.s. central bank is expected to leave its interest rates unchanged Wednesday, after a meeting of money (Photo KAREN BLEIER. AFP)

The monetary Committee of the u.s. central bank is expected to leave its interest rates unchanged Wednesday, after a meeting money, the members of the Fed pondering further the pace of growth and inflation before new turns of the screw this year.

If you believe the futures markets, financial players expect 93% to a status quo on interest rates, which are currently between 1.50% and 1.75% after having been raised a quarter of a percentage point in march.

“Not up to Wednesday, but probably in June,” summary for AFP Joseph Gagnon, a former economist at the Fed, currently at the Peterson Institute for International Economics (PIIE).

At its previous meeting, the Fed showed confidence in the idea that “inflation will progress in the coming months and reach its target of 2%,” a sentiment now shared by the markets.

The yield on Treasury bills to 10-year-old has reached the symbolic threshold of 3% last week for the first time in 4 years, investors betting on a rebound in inflation and therefore rates.

This movement of attraction towards Treasury bills was at the expense of the market shares in an environment that has become volatile since the month of February.

In the Face of this optimistic on economic activity, boosted by the fiscal stimulus of tax cuts and increased military spending promoted by Donald Trump, the members of the monetary Committee (FOMC) were divided in march on the pace of increases in interest rates, intended to prevent overheating.

They bet on the average up here on two other hikes this year, but nearly half of the participants, as well as many economists, looking to the other three bearings.

– Powerful fiscal stimulus –

“The market players will scrutinize closely the release for any indication on the pace of increases to follow,” said Kathy Bostjancic of Oxford Economics.

The decent performance of the growth to 2.3% annual rate for the quarter of winter, announced Friday, is not expected in the immediate future to increase the pressure on the Fed to tighten faster the screw money. On the other hand, his attention will be attracted by the increase in the cost of employment (+0.8% in the 1st quarter) while the figure for inflation in march will be published on Monday, the eve of the beginning of the meeting.

In February, it was, according to the index, PCE is 1.8% annual rate, approaching slowly to the target of 2%, a goal which it should achieve or exceed this year.

The members of the monetary Committee will also discuss the future impact of the powerful fiscal stimulus.

“If as expected, growth accelerated after the moderation of the 1st quarter, it is expected that inflation will follow,” said independent economist Joel Naroff.

“It is likely that by the end of the 2nd quarter, the index price touches or exceeds the target of 2% inflation” as the Fed considers healthy for the economy.

“Good economy can not remain unpunished”, he adds, referring to the more expensive prices which will accompany the rates on credits are higher also.

To Joseph Gagnon, “the fiscal stimulus is so enormous, equivalent to 2% of the gross domestic Product (GDP) that it will necessarily have an effect on growth”. It is equivalent to an increase in the fiscal deficit of 1,600 billion dollars over ten years.

“We have not had such a revival in the past 50 years, when in 1965 the cuts to taxes, spending of the Vietnam war and the social measures had brought about a comparable experience,” he continued, adding that it “was not finished” with the inflation of the 1970s.

It predicts three more rate increases of a quarter percentage point (0.25 per cent) this year, in June, September and December.

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