As we said in the previous article, inflation now remains the main problem not only in the United States but also for the whole world. This problem is so acute that yesterday there was even a meeting between US President Biden and Fed Chairman Powell, which was devoted to the topic of inflation. If anyone thought that important decisions were made at this meeting, then they are mistaken. Biden and his Democratic Party are on the verge of new parliamentary elections to be held this year. Of course, they would like to maintain a majority in the Lower House and the Senate, so they need to show good economic results ahead of these elections. And the issue of inflation is now as important as the issue of Ukraine. If Biden has no problems with Ukraine, since the United States provides all the necessary military and financial assistance to Kyiv, then everything is much more complicated with inflation. This is exactly the thought Joe Biden was trying to convey to Powell. He noted that he respects the independence of the Fed, but stressed that it is extremely important for the American population to lower the cost of gasoline, food, and consumer goods. Although in the current circumstances, we are probably talking about a slowdown in the growth of prices for everything. Biden noted that inflation should be reduced at any cost, even if it leads to some slowdown in the economy and an increase in unemployment. It is also worth noting that low unemployment is now negative for the US economy. On the one hand, maximum employment guarantees maximum GDP growth. On the other hand, the higher the employment, the more companies begin to fight for some employees, offering them higher wages, which again provokes inflation to grow. Therefore, in the current situation, a small increase in unemployment may even be useful. Especially in a compartment with the QT program and an increase in rates.
Jerome Powell, in turn, assured that the regulator is ready to raise rates as much as necessary to return inflation to target levels. But, from our point of view, he's being a little deceitful. The Fed cannot raise the rate, for example, to 5%, because in this case, the American economy will fall into recession. However, even if an increase to 3.5% combined with a monthly reduction of the Fed's balance sheet by $ 95 billion is enough in the medium term to significantly reduce inflation, then it will take at least 1.5-2 years to implement this plan. And this is provided that the geopolitical situation in Europe does not worsen and the situation with the coronavirus pandemic around the world does not worsen. And, as you understand, no one can guarantee this. The Fed and the ECB have been counting for a long time that inflation will begin to slow down "by itself", but now it is absolutely clear that this will not happen.
