The options taken by the Fed at its meeting on December 15 validate investors’ expectations Anticipations that the Fed itself had forged with these same investors in recent weeks.
We can summarize the message of the US central bank as follows:
Until at least 2024 US growth will be above its potential and as a result the unemployment rate at 3.5% in 2022, 2023 and 2024 will be below the long-term target of 4%.
This will not prevent the inflation rate from converging on the Fed’s target in 2023.
The economy regains its virtue by creating a lot of jobs without creating inflationary pressures. Without saying so explicitly, the Fed validates the idea of an upcoming spike in inflation and that inflation would be temporary.
In the face of this, it normalizes what it can by reducing its asset purchases. The purchase program will now end next March and the central bank could then hike rates 3 times in 2022 before starting again 3 times in 2023 and 2 times in 2024.
This rise in interest rates therefore has nothing to do with inflation. The Fed just doesn’t want to be so accommodating anymore as the recovery in activity is strong.
However, at no time does it become restrictive. In 2022 and 2023 the real Fed funds rate is negative and it could be zero in 2024. The central bank’s objective is therefore clearly to be as neutral as possible when the cycle is already well advanced.
The US central bank no longer has the capacity to regulate the macroeconomics, and we can still see this at the meeting tonight.
