Home Business The delicate weaning of an economy “on a drip”

The delicate weaning of an economy “on a drip”

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Departing from the cautious vocabulary to which he is accustomed, the chairman of the American Federal Reserve (Fed), Jerome Powell, announced an interest rate hike for the month of March. The bank will also end its asset purchase program. The head of the American central bank estimated that there is a “risk that inflation will continue”, and even “accelerate even more” while the labor market is strong. That “creates space to raise rates without hurting it”, he explained on Wednesday evening, January 26, during a press conference which followed the monetary policy committee of the bank.

The world economy placed on a drip for two years

By announcing these decisions, which have an impact on the entire world economy, the Federal Reserve takes note of the fact that times are changing. In March 2020, in the face of the epidemic shock, Jerome Powell had reduced interest rates to zero, opening an era of free money. He had also set up a program of massive injections of liquidity, at the rate of 120 billion dollars per month (107 billion euros), through the purchase of Treasury bonds and mortgages. The European Central Bank (ECB) had done the same.

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After two years during which the world economy was thus placed under an oxygen tent, the Fed considers that it is time to return to normal, because this support no longer has any reason to exist. Vaccination and the upcoming arrival of drugs against Covid now make it possible to avert the risk of a new confinement. Economic activity has picked up well in the United States, and unemployment has almost returned to its pre-crisis level, at 3.9%.

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A “very unlikely” rate hike in Europe

On the other hand, the supply problems as well as the increase in the purchasing power of American households have caused prices to rise: inflation was 7% for the year 2021, a figure which had not been reached in forty years. This is the reason why the US central bank decides on this rate hike.

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In Europe, the same development is looming. Admittedly, Christine Lagarde, the President of the ECB, judged “very unlikely a rate hike in 2022”, considering that there is not the same urgency in Europe to fight against inflation. But the European Central Bank faces the same challenge as the Fed: that of gradually turning off the tap on asset purchases and raising rates to return to a more normal functioning of the economy, without breaking the recovery or weighing down state debts.

All markets took the hit after the Fed’s announcement. They had already experienced a fit of excitement a few days ago, as this announcement approached. “We have lived for several years in a reign where liquidities were available in abundance, which distorted the financial balances. The return to normal risks causing the sudden deflation of speculative bubbles, analyzes Véronique Riches-Flores, economist and president of RF Research. The global economy was like a patient on a drip. And when you unplug it, there is a risk of relapse. »

“The markets have become a very fragile playground”

Asset buybacks by the Fed and the ECB have indeed largely contributed to boosting stock market prices: the Dow Jones reached a historic record on January 4 at 36,953 points, and the CAC 40 also broke its own record. on January 17 at 7,353 points. Many assets have also benefited from this climate: cryptocurrencies, real estate or raw materials, whose prices have soared.

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“The markets have become a very fragile playground”, observes the economist. “If we believe that we have a prospect of sustainable growth and a new virtuous cycle ahead of us, central banks can reduce their monetary support, because there will be relays. The pill can be swallowed without too much risk. But if this is not the case, as soon as the support stops, the growth inwill suffer as well as the financial situation of the States”, she warns.

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The question posed to central bankers, at the end of the day, is whether the developed economies are still capable of generating growth without being over-stimulated by monetary creation. By announcing the end of these support measures, Jerome Powell is betting that this is the case. But he’s like the pilot of a jumbo jet trying to land it. He engages in a delicate maneuver, with the concern to avoid breakage. However, the moment comes when you have to accept to touch the ground.

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America’s booming economy

The gross domestic product (GDP) of the United States recorded a growth of 5.7% in 2021, its largest increase since 1984. For the fourth quarter alone, growth was much stronger than expected, at 6, 9%. In addition, consumer spending by households, which represent nearly three-quarters of the US economy, jumped 7.9% over the year as a whole, under the effect of the massive support plans that were translated into the sending of checks to 80% of American households.

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