Inflation: The Central Bank Sowed A Storm

A press release issued after a regular meeting of the US Central Bank Board contains an upwardly revised inflation forecast for this year.

In such cases, the Central Bank usually announces an increase in its key rate, with the aim of increasing the cost of bank loans, bringing down the heat of business activity and thus curbing the inflation flywheel. This time, the Central Bank promises not to raise the rate either this year or next, but only in 2023, and not by much, only about half a percent. And this is in relation to the current almost zero rate. Nevertheless, the prospect, albeit a distant one, of a change in the course alarmed the stock markets so much that stock quotes on them went sharply down for several days in a row.

The central bank does not plan to raise rates before 2023 due to its unwillingness to undermine the process of correcting unemployment in America. This is the official position. However, analysts from the Republican camp explain the restraint of the Central Bank by implicit pressure from the Biden administration: if it raise the rate in the near future, the Americans will immediately start talking about the fact that this is a response to inflationary expectations generated by gigantic budget spending that the White House and its obedient Congress are imposing on the country. … Democrats advise citizens not to be complex about the sharp jump in prices that occurred in the first quarter of this year, it is, they say, a temporary phenomenon caused by “covid” disruptions in global production chains. Central Bank Chairman Jerome Powell actually claims the same thing, and Republicans are hinting that the country’s main banker is playing along with the “donkeys.”

In addition to raising the key rate, the Central Bank plans at some point to curtail a large-scale program for buying government bonds stored on the balance sheets of commercial banks. Such a program is a common way of pumping credit resources into the economy. The Central Bank has recently spent $ 120 billion for these purposes every month. When the emission valve closes, the loan becomes more expensive, and it becomes less profitable to borrow funds to play on the stock exchange. This is another reason why New York and other leading stock exchanges are currently experiencing a pullback.

With the contraction of credit, the dollar supply in the turnover of the world economy is also shrinking. Therefore, after the announcement of the Central Bank, the dollar exchange rate jumped in the foreign exchange markets.

The central bank predicts 7 percent US GDP growth in 2021, 3 percent inflation, year-end unemployment of 4.5 percent, which will drop to 3.8 percent next year. Doesn’t 7 percent growth mean that the American economy can easily do without the stimulating fireworks fired by the Biden administration? It’s a shame that none of the journalists bothered to ask Powell about this during his hour-long press conference.

Published in the newspaper “Moskovsky Komsomolets” # 26 of June 25, 2021

Newspaper headline: The central bank sowed a storm

Source: Все материалы – Московский Комсомолец by

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