Sunday, January 16

Powell will resist a new inflation record in the United States

The bags will hold their breath until the inflation data for the United States, corresponding to November, is known. Estimates collected by the Bloomberg consensus expect prices to rise again to 6.8 percent, breaking a new record.

In October they closed with a rise of 6.2 percent in year-on-year terms, above the forecasts that were expected to stand at 5.9 percent. This is the highest level in the last 30 years.

The monthly growth will be 0.7 percent, compared to 0.9 percent the previous month. Regarding inflation, without taking into account energy and food, it will stand at 4.9 percent, compared to the previous figure of 4.6 percent.

If confirmed, it would serve as one more argument for the Federal Reserve in order to tighten its monetary policy, confirming the first rate hike in the first half of the year.

But the arrival of the new omicron variant seems to have turned the agency’s plans upside down.

The doubts that omicron generates about inflation

A few weeks ago, Fed Chairman Jerome Powell surprised the market with the sharp turn of his speech, in which he acknowledged that inflation was not as transitory as expected.

The problem is that this change in tone comes at a time when Omicron could further dazzle the Fed’s visibility, they warn from Lyxor.

The general opinion is that omicron will delay the rate hike planned by the Fed for a month, going from June to July, but it will not derail the central bank’s plans.

Yes indeed, it could also act as a generator of more inflation, as a consequence of new confinements, enhancing bottlenecks.

Although, “in the United States, both the federal and state governments have little appetite for further lockdowns, so omicron is unlikely to trigger a slump in US economic activity approaching the March 2020 scale,” explains Seema Shah, Chief Strategist at Principal Global Investors.

A more aggressive speech by the Fed

For Lyxor analysts, referring to the hardening of the speech, “this important change is strange, and marks a significant change in the Fed’s assessment of the relationship between inflation and growth.” What is surprising is not so much the need to normalize.

In fact, Powell did not add much to what was already known. Activity is strong, inflation is high, and it has expanded beyond volatile components.

But the abrupt change of tone marks a clear reorientation of the Fed’s priorities (Which, by the way, complicates things a lot for the ECB because the dynamics of inflation are different in Europe).

For the moment, the Fed, in fact, has only come close to what the market was already setting.

December’s weaker-than-expected labor market report (210,000 jobs vs. 550,000 expected) and smoother hourly earnings growth (4.8 percent yoy vs. 5.0 percent expected) ” it leads us to maintain our expectation of two rate hikes next year, starting in June ”.

Fed brushes off inflation fears

For now, the Federal Reserve has put aside fears of the impact of this new variant in favor of tackling inflation by planning to accelerate cuts in asset purchases.

The US central bank plans to discuss the asset reduction “to finish a few months earlier” than initially planned when it meets on December 14-15, Fed Chairman Jerome Powell said.

Therefore, the Fed’s calendar has accelerated instead of altered, point out from Lombard Odier. This does not imply, experts continue, that fiscal and monetary policy will have to gradually adjust and remain flexible in the face of continuing uncertainties.