The round of central bankers continues. After the ECB two weeks ago, the Fed and the BoE followed last week with their monetary policy meeting. If the ECB, with its relatively low inflation and greater exposure to the Ukrainian crisis had not softened its rhetoric, it would be difficult to expect otherwise from American and British institutions. On the side of the Fed, the objective displayed by Jerome Powell is to "break" inflation while maintaining growth. Compared to the December meeting, the economic projections have been broadly revised. The growth forecast has thus been reduced from 4% to 2.8% for 2022, while inflation is revised upwards from 2.6% to 4.3% for this year, but also for the following years (from 2.3% to 2.7% in 2023 and from 2.1% to 2.3% in 2024), i.e. above the central bank's target. If the consequences of the war in Ukraine remain uncertain, particularly on inflation, the Fed has no choice but to act in order not to let inflation slip above its long-term objective. This even if the change in doctrine which now targets average inflation over a long period gives it additional leeway. Thus, the key rates were increased as expected by 25 bps and the members of the FOMC now anticipate Fed funds within the 1.75% / 2% limit by the end of the year (compared to 0.75% / 1% in December) i.e. 6 rate hikes of an additional 25 bps. As with the ECB, the Fed will remain “data dependent” in determining its monetary policy in the months to come. Thus, a rise of 50 bps at once is still not to be excluded. The other point of attention which remained unanswered, concerns the reduction of the balance sheet (quantitative tightening) of the central bank, postponed to the next meeting, even if Jerome Powell confirmed that the members of the FOMC had discussed it, which should appear when the Minutes are published.
The financial markets reacted rather well to this more hawkish turn even though there are doubts about the growth forecasts, which some consider optimistic. The Fed seems to have taken the measure of inflation and its rate hike expectations are now in line with the expectations of the market which judged until now that the Fed was 'behind the curve'.
In the wake of the Fed, the BoE also increased its key rates by 25 bps even though the central bank was more cautious in its communication because of the Ukrainian crisis. Clearly, this crisis makes any forecast almost impossible. INSEE has for example suspended its growth forecasts for the coming months due to multiple consequences linked to this geopolitical events. Central banks will therefore have to continue their balancing act: fight against inflation, which should remain firm, while trying to manage growth.
