The fed member sees growth below the trend, with a greater risk of inflation

The economic growth of the United States will probably be “materially” below the trend and the unemployment rate will increase during the year, since companies and families adapt to the highest prices caused by new import rates, said the president of the Fed of St. Louis Alberto Musalem.

“I don’t have a basic recession scenario,” Musalem said in an interview with Reuters. “(But) I think growth will probably come physically below the trend”, which has estimated at about 2%.

“The risks from both sides are materializing”, with the highest rates of expected for pressing prices, while the decline of trust, a serious blow to the wealth of families due to the recent strong drop in equity markets that could depress the expenditure and the impact of higher prices, all combined for slowed growth, said.

The response of monetary policy will depend on how inflation and unemployment will evolve in the coming months, if the prices seem persistent and if the inflation expectations will remain consistent with the inflation objective of 2% of the Fed, Musalem said, which this year is one of the members with the voting rights in the monetary policy of the Fed.

He defined anchored expectations “a necessary but not sufficient condition” so that the Fed achieves its 2%inflation objective.

“Now we have … tension between our two objectives in the future,” said Musalem, referring to the objectives of the Fed to maintain unemployment low and stable inflation. “My posture will be very vigilant in relation to these two types of risks”, maintaining a “balanced approach” while inflation expectations do not threaten to increase.

The highest prices deriving from the rates could lead to a single price shock that the Fed could widely analyze by defining politics, although Musalem said he had considered this “risky” approach. In the same way, the changes in the financial conditions and in the wealth of families are more important, more time are maintained, with the possibility still existing that the high rates can be negotiated for lower levels over time and the markets recover.

But the Fed authorities are increasingly worried about the fact that the increase in the expected rate, as announced, together with the retaliation of other nations, could translate into a more persistent inflation that would require a more rigid monetary policy; The slowdown of growth, on the other hand, could possibly increase unemployment, a situation that Fed would like to fight with more flexible monetary conditions.

This situation, which can force one choice on which objective to emphasize the other, is among the most demanding for central banks, a point that the political formulators, including the president of the Fed Jerome Powell, have highlighted the recent comments and, in particular, since the president of the United States Donald Trump, on April 2, released rates that go beyond what the investigators and the authorities of the Fed have expected.

“I am witnessing a high degree of uncertainty … I am witnessing the confidence of families and companies below and down. “All this suggests a negative side for growth and a positive side for inflation.”

As for the recent volatility of the market, including the strong drop in shares prices and the increase in some credit spreads, Musalem has declared to observe a vast series of indicators of the financial market and believes that the financial conditions are closer.

However, the political managers of the Fed usually distinguish between the sometimes marked changes that occur in financial markets and in the events that can ensure that the markets go in full collapse.

So far, he said he saw the recent dynamics of shares and credit “as a market response to a revaluation of the risks of negative growth for the global economy”.

“I don’t feel dysfunction on the market,” he said. “Yes, volatility has been high. Yes, the prices of the activities … be they coins, fixed income, actions, corporate credit, raw materials, everyone has moved substantially and irregularly moved. But I still don’t feel a problem of operating the market.”

Source: Terra

Rose

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