Fed 'committed to staying the course' despite 'moderate growth'

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Fed “determined to stay the course” despite “moderate growth”

Fed leaders say more rate hikes are on the way. (File photo)

The US Federal Reserve (Fed) is “committed to staying the course” on tight monetary policy as long as inflation does not x27;has not returned to its expected level of 2% even if it leads to “low growth in 2023”, estimated Thursday in a speech Lael Brainard, vice-chairman of the Fed.

Inflation has slowed in recent months, which is important for American businesses and homes. But inflation remains high and it will take time to bring it down to 2%. We are committed to staying the course, Ms. Brainard said during a speech at the University of Chicago School of Economics.

Inflation slowed to 6.5% year on year in December, reaching its lowest level in 2022 after peaking at 9.1% year on year in June.

New York Fed Chairman John Williams also said at a separate event that inflation was still too low. high and that lowering prices would require a period of slow growth and weakening labor market conditions.

If the Fed has already acted vigorously, it is clear that monetary policy must go further, he noted, anticipating for 2023 GDP growth of around 1% and an unemployment rate around 4.5%.

At its last meeting in mid-December, the Fed reduced the amount of its hikes, raising its main policy rate by half a percentage point, ci now in the range of 4.25% to 4.50%.

If central bank officials plan to push it above 5% and hold it high for a while, the drive now is to tighten the screw more slowly than in the first phase.

< p class="e-p">Admittedly, the effects of the rate hike are still not fully felt on economic activity, but Ms. Brainard noted the significant weakening of the industrial sector and a further moderation in consumer spending.

Net disposable income fell 4.1% over the first nine months, suggesting that current consumption is primarily driven by savings and credit, she said.

However, household savings, especially the smaller ones, have largely shrunk and the tightening of both monetary and fiscal policy in a global environment is expected to lead to weaker growth in 2023, pointed out Ms. Brainard.

However, the labor market continues to resist, despite a level of employment slightly lower than before the pandemic, which Ms. Brainard explains in particular by a drop in immigration and an increase in retirements.

Finally, salaries have certainly increased significantly, but are distributed in different ways. The increases obtained by low wages were offset by a fall in real wages among upper middle incomes, which helped to avoid feeding the price-wage spiral feared by economists.

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