Many media outlets highlighted in their headlines that the general increase in prices in the United States was cooling off, which would moderate the interest rate hikes of its central bank (the Fed), but that is an apparent and misleading data, since the component Core remains at persistently high levels.
It is true that general inflation in the United States decreased in March for the ninth consecutive month, which is attributed to a drop in the prices of gasoline and food, but here we have to clarify that the underlying measurement of inflation -which reflects better long-term trends by excluding energy and unprocessed food in its calculation – increased due to pressures on other prices such as rental prices.
Overall consumer prices rose 5 percent from a year earlier, down from 6 percent in February and a peak of 9.1 percent in June last year, the highest in 40 years.
But core prices rose 0.4 percent from February, raising the annual rate to 5.6 percent from 5.5. And this data is not apparent.
While goods inflation is easing as supply chain bottlenecks caused by the pandemic are resolved and commodity prices fall, the decline is slow and uneven.
In line with our view, analysts at the influential London-based Barclays bank, they expect annual inflation to drop to 3.3 percent by the end of 2023up from his previous forecast of 2.9 percent.
With such data in the background, the minutes of the US Federal Reserve (Fed) become more interesting.
In the report of the Fed’s March 21-22 Federal Open Market Committee (FOMC) meeting, it is read that the US economy could fall into recession at the end of 2023, due to the crisis in the banking sector. What is likely.
It was then that several members of that commission contemplated a pause in the increase in interest rates after the bankruptcy of two regional banks and the forecast that stress in the banking sector would cause the economy to enter recession.
When evaluating the possible consequences of the banking sector – the minute states–, Fed members projected a “moderate recession” which would start at the end of 2023 and recover in 2024-25.
It should be remembered that despite the collapse of Silicon Valley Bank (on March 10) and Signature Bank (two days later), the Federal Reserve’s rate hike was not stopped, and policymakers agreed to another hike, despite of the risk of recession. We can expect the same at your next meeting in May.
In this sense, the members of the FOMC highlighted the need to maintain flexibility in monetary policy, in view of the uncertain economic outlook, since some participants considered that the downside risks to growth and the upside risks to unemployment had increased due to bank failures.
They also warned that inflation is still well above the Committee’s long-term target. (2 percent) and that recent economic data remained strong, so upside risks to the inflation outlook remained a key factor in determining monetary policy.
“Maintaining a tight policy stance until inflation is clearly on a downward trajectory toward 2 percent would be appropriate from a risk management perspective,” the document notes.
Several participants even highlighted the importance of inflation expectations remaining anchored in the long term, and that the longer they remain high, the greater the risk of inflation expectations becoming unanchored.
An interesting opinion in this regard was given by the managing director of the International Monetary Fund (IMF), Kristalina Georgieva, who foresees that the Fed will maintain a restrictive stance, given that core inflation remains high and “sticky”.
“I would not like to give a projection of how many times the Fed will raise the rate. What I can say is that the Fed will be guided by the data”, qualified the Bulgarian-born official, with whom we agree.
It is in this scenario that the recent exacerbated optimism of the stock markets, reflected in strong rises this week and a drop in the dollar, could be temporary. The coin is still in the air, but what is a fact is that it would be a mistake to discount that the Fed will soon start lowering interest rates and injecting dollars wholesale. To do that would mean putting the finishing touch on the greenback at the worst possible time, and the United States is not going to shoot itself in the foot.
Editor’s Note: This text belongs to our Opinion section and reflects only the author’s vision, not necessarily the High Level point of view.
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William Beard Master in Economics from the Austrian School; liberal, gold market specialist and editor of investment newsletter Top Money Report