The major US stock indices – DOW Jones, NASDAQ, and S&P 500 – closed higher on Tuesday. However, the current values mean little. The stock market came to a standstill awaiting not just the Federal Reserve's actions but also the trigger that could determine its future. It is no longer a secret that the central bank has started the monetary policy normalization program that could last for two years. This means that interest rates will be raised all this time. The US regulator is also planning to shrink its balance sheet this summer. From now on, the Federal Reserve will be guided by inflation whenever it takes any decision on interest rates. Inflation is now at 7%. Tomorrow, however, it may become known that it has accelerated to 7.3%. So, let's now imagine what measures the Federal Reserve should take to return inflation to the 2% target and how long can it take.
Most experts are sure that even if the Fed raises the rate to 1.50% this year, inflation will unlikely fall even to 3-4%. The first rate hike will take place already in March. Overall, the regulator will have 7 meetings to increase interest rates - 7 meetings and 9 months. Inflation has been growing for more than a year. Therefore, in the best-case scenario, it may take inflation around the same time to get to the target level. It took the Federal Reserve a lot of effort to boost inflation to 2%, and everyone thought that it would be rising steadily from then on. Early last year, Jerome Powell said on numerous occasions that he would allow inflation to stay above the target level in order to offset periods of low inflation. Then he voiced the opinion that inflation growth was just transitory. However, another wave of the pandemic, the lack of a solution to supply chain woes, as well as growing demand and money supply have caused inflation to hit the 40-year high. Therefore, a 0.25% increase in the rate may simply go unnoticed. What is more, the regulator is unlikely to raise rates immediately by 0.5% at each meeting. After all, the impact on the economy should be smooth. Otherwise, a series of bankruptcies and a slowdown in the American economy will be inevitable.
