why the Fed raised interest rates by only 0.25% – Corriere.it

The fever of inflation drops and, with it, also that of rates: the Federal Reserve which in November had raised the cost of money by 0.75% to try to extinguish the flame of prices and in December had decided on a further increase of 0 .50%, on February 1st it approved another adjustment, this time reduced to 0.25. The head of the US central bank, Jerome Powell, explained this further but more limited increase in simple words: For the first time I can say that the disinflation process has begun, but too early to claim victory.

Things get better

Things are improving, there is no longer the specter of uncontrollable growth in the prices of raw materials, energy and food. And higher rates have put an end to the overheated housing market. Now the fears are concentrated above all on the cost of labour: it is feared that the obstacles to a reduction in inflation which will, in any case, take time, could come from here. The data is contradictory. Two days ago, some slowdown in the pace of wage growth in December emerged. However, other data arrived on Wednesday that testify to a still very rigid, limited labor market: unsatisfied job offers rose to 11 million, while the unemployment rate dropped to 3.5% in December: the lowest level low of the last half century.

The positive reaction of the markets

Yesterday the Fed made no further forecasts in this area, but the documents published some time ago speak of unemployment which, in order to cool down inflation in a stable manner, should rise again to at least 4%. On Wednesday evening, the markets reacted positively to the decisions of the Fed which in the last year brought the cost of money from zero to the current 4.50-4.75%. Waiting for another touch up or two like Wednesday later in the year, despite the widespread perception that prices will continue to fall in these winter months. Powell is aware of this, but in recent months the fear of inflation that seemed to escape the control of the monetary authority was too strong.

The soft landing

The head of the Fed, once accused of having moved too late to counter the surge in prices, perceives that the market is beginning to think that the US economy in 2023 could be able to avoid the recession or could experience a very short and very light one . the soft landing scenario, presumably to his liking too. The Fed chief, however, wants to prevent Wall Street from celebrating too soon. And so he warns: even if things are going better, the Fed must look ahead and continue to tighten, even if with less severity: Better to do too much than too little. The worst thing, says Powell, would be to be more accommodative now, favoring a rapid recovery, except having to tighten again at the end of 2023 because inflation is once again frightening.

The radicalization of US politics

In between, then, there will be the expiry of the federal public debt: President Biden and the head of the Republicans in Congress, Kevin McCarthy, began discussing yesterday about how to defuse a bomb that risks exploding in mid-June with serious consequences for the US economy. The extreme radicalization of US politics makes it very difficult to find a solution, but there is still time.