“There are no signs at this point that this is a 2 percent annual inflation economy. Right now there are three scenarios: a soft landing, no soft landing and inflation never falling below 3 percent; a harder landing if Fed rate hikes hit the economy.”
These statements were made last week by Larry Summers, one of the economists most listened to by the financial markets of the United States and the world, before his time as Secretary of the Treasury of his country and today from his trench at Harvard and in various media. Communication.
And he also made a suggestion that, for the moment, is unthinkable for the US central bank, due to all the consequences it would have on its credibility.
“The Fed will probably have to raise interest rates further or accept, even temporarily, a higher level of the inflation target.”
It is not the first voice to speak out about the possibility that the Fed should modify, even momentarily, its inflation objective, raise it to 3 percent, so that it has greater margin to control this inflationary rebound and can reduce, little by little, the objective again towards the 2 percent zone.
However, Fed Chairman Jerome Powell has been very emphatic in pointing out that the Fed will maintain its inflation rate target at 2 percent annually.
Their Critics point out that accepting to modify the objective would be equivalent to accepting failure in the fight against inflation; In this context, several other voices maintain their recommendation that the Fed should raise its objective, because as Summers says, inflation does not stop and is closer to 3 percent than the 2 percent of the current objective.
The real question is, should the Fed modify its target inflation rate of 2 percent annually? Some economists answer us:
There would be greater pressures: Banco Base
Gabriela Siller, director of analysis at Banco Base, gives her opinion on what it means, from her point of view, to raise the inflation target in the largest economy on the planet.
“The 2 percent inflation is because the United States is a developed economy, that is why the euro zone also has that 2 percent level. In reality, this objective arises from deviations in the measurement of inflation but, theoretically, inflation in both areas should be zero, but the economy is moving, prices rise and others fall,” he explains.
“Raising the target to 3 percent would be very risky, because you are allowing for greater movement in prices.that there is more inflation and there could be an overreaction and, then, the Fed will battle for longer with inflationary pressures not at 3 percent, but much higher,” mentions the economist.
Feasible to change objective, but only for two years: Barclays
Gabriel Casillas, chief economist for Latin America at Barclays Bank, also explains his view on the possibility of a higher inflation target by the Fed.
“The Fed could accept annual inflation greater than 2 percent, as long as the average inflation projected for the next two years is within the central bank’s original objective, that is, 2 percent. This change to an average inflation targeting regime took place in 2020″, mentions.
“It is impossible for inflation to remain static due to many factors, including the seasonality of some prices (tuitions, winter clothing, summer clothing, etc.), as well as due to the dynamics of a market economy where there are prices such as agricultural products that rise and fall significantly in response to factors such as climate, but also supply and demand,” explained the expert from the English bank.
“The objective is that inflation does not stray “too much” from the target and that it becomes a ‘chronic’ phenomenon. When this happens, it is a clear sign that monetary policy is very relaxed and it is necessary to restrict it,” concluded Gabriel Casillas.
Fed’s fight against inflation, still without success: Janus Henderson
Although progress has been made in reducing general inflation – and even core inflation – the increase in ‘sticky elements’ forces the Federal Reserve to remain cautious.
This is stated by Janus Henderson Group in an analysis signed by Jim Cielinsky, global head of fixed income, who points out that investors should prepare for a scenario of high rates for a longer period of time, instead of positioning fixed income portfolios for an imminent downward turn.
“With the hard lessons learned from changing course too soon a generation ago, Fed Chair Jay Powell reiterated that an additional rate hike remains on the table should inflation’s downward trajectory fail to meet expectations.” expectations of the central bank,” said the specialist.
In the analysis, it is reiterated that this is one more step in the Fed’s strategic communication, which today prioritizes moving slowly and analyzing economic data meeting after meeting.
“Although the year-on-year price index of personal consumption expenditure has fallen to 3.3 percent and its basic component to 4.2 percent, other indicators are counterproductive.
For example, the Atlanta Fed’s annual consumer price index remains at 5.3 percent.
According to the analystthe US economy may be too resilient and rate hikes may not be as efficient to stop inflation.
“We do not believe that the Powell Fed will take the risk that the current cuts will be enough. The perhaps surprising resilience of the US economy is evident in the fact that the Fed has modified its assessment of growth from ‘modest’ to ‘moderate’ and now to ‘solid’ in the last three meetings,” the analysis says.
“Markets are by nature forward-looking and anticipating turning points in rate regimes and the economic cycle presents opportunities to reap excess returns. We haven’t gotten to that point yet. We believe there are too many variables at play, such as the continued rigidity of the labor market and notable geopolitical risks,” he concludes.
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