What are the new barriers to Fed rate hikes? Known to one Fed

What are the new barriers to Fed rate hikes? Known to one Fed

What are the new barriers to Fed rate hikes? Known to one Fed

(Reuters) – The US Federal Reserve on Wednesday effectively outlined a three-part test that must be passed before it hikes interest rates: the economy must reach “peak employment” and inflation “accelerate to 2%” and go to ” a trajectory where it will moderately exceed 2% for some time. ”

It could be years before the economy hits any of these indicators, let alone all three, according to the latest forecasts released by the Fed on Wednesday. Most regulator officials expect inflation to only reach 2% by 2023, while unemployment will remain above pre-crisis levels.

Nevertheless, questions are already being raised about what these barriers will mean in practice.

LOW UNEMPLOYMENT, BUT NOT JUST

Fed chief Jerome Powell said the economy is “far” from passing this test and that he “would very much like” to return to pre-crisis unemployment rates of 3.5% or even lower from the current 8.4%.

Powell added that there is no “magic number” for maximum employment, and then listed a number of other metrics the Fed would like to see, including high labor force participation and wage growth.

The lack of a precise criterion for determining maximum employment “makes the full employment threshold largely meaningless,” write economists at Barclays (LON: BARC). In practice, this means that “the Fed will rely on inflationary pressures to lock in peak employment.”

DON'T SLIP WITH INFLATION

For inflation to accelerate to 2%, it will not be enough for it to rise to 2% for just a month, Powell said Wednesday. “The idea that we will be looking for the fastest way out is just not about us,” he said.

But how many months should inflation hold at 2%? He did not say. Nor did he say how the Fed was originally going to do this.

“MODERATELY EXCEED 2%”

The regulator accompanied this goal with the greatest number of clarifications. Powell provided some clarification here, saying that the Fed is looking at an inflation trajectory “where it will moderately exceed 2% for some time.”

(Anne Safir and Howard Schneider. Translated by Alexey Kuzmin. Editor Marina Bobrova)

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