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Exacerbated by the global Covid-19 pandemic, price increases have
cut short a historical downward trend resulting from two decades of
supply chain globalisation.
UNITED STATES, REAL INTEREST RATES
Lastly, and most importantly, the Fed’s decision comes at the end of
an exceptionally accommodating phase of monetary policy, unprece-
dented in modern US history. Maintained near the lower zero bound
since March 2020, real interest rates have plunged into negative ter-
ritory, sinking to depths never seen before (see chart 2). This was also
the case for bond yields, which remained very low thanks to the central
bank’s securities purchases. The last wave of quantitative easing (QE),
which amounted to USD 4,600 billion (20 points of annual GDP), fuelled
exceptional money supply growth and helped rekindle inflation, addi-
10y (Treasuries)
3 month
10%
5%
0%
2
tion to the supply shock (see chart 3 and Wolf, 2021 ).
-
5%
The Fed met its initial goal of avoiding liquidity shortages and
countering the depressive effects of the Covid-19 pandemic, and the
economy recovered beyond all expectations. It has largely surpassed
pre-pandemic levels. With the jobless rate dropping below 4%, the
US economy is verging on full employment. The keyword thus became
the normalisation of monetary policy.
-10%
1962
1972
1982
1992
2002
2012
2022
CHART 2
SOURCE: IMF, REFINITIV, BLS
Just how far can the Fed go? According to the latest projections of
the Federal Open Market Committee (FOMC), the Fed funds target rate
could rise as high as 2.8% over a 15-month horizon, which implies six
more rate increases of 25bp each in 2022, and at least three more
in 2023. Starting in May, it will scale back the amount of securities
outstanding held as part of QE (USD 8,500 bn), at a pace that has to
be specified. As presented, the Fed’s current road map is much more
demanding than the December 2021 version. In the eyes of Fed Chair
Jerome Powell, this road map is workable because the US economy is
back to full health.
UNITED STATES, MONEY AND INFLATION
CPI 'core', y/y (LHS) M2, y/y (RHS, lagged)
8
6
4
%
%
%
30%
2
0%
0%
STRESS TEST
1
The planned monetary tightening appears to be a serious stress test.
Since inflation is supposed to decelerate, it implies at least a 5-point
increase in real key rates in a little more than a year. This is no small
matter for an economy which rely increasingly on credit. In 2021, net
private sector borrowing amounted USD 1,596 bn, the highest level
2%
0%
0%
2
010
2012
2014
2016
2018
2020
2022
3
since 2007 . Temporarily hampered by the Covid-19 pandemic, leve-
CHART 3
SOURCE: BLS, FED
raged loans rebounded strongly, as illustrated by the increase in M&A
4
and securitisation activities (IMF, 2021) . Even as Federal transfers
were boosting the cash holdings of companies, their net debt swelled.
It has held at high levels as a share of GDP (chart 4).
UNITED STATES, NON FINANCIAL CORPORATE NET DEBT/GDP
For certain market participants, such as investment funds taking part
in leveraged buyouts (LBO) or Real Estate Investment Trusts, the Fed’s
action has already had concrete consequences by helping to flatten
the yield curve. Transformation conditions tightened while acquisitions
demanded high earnings multiples, calming the enthusiasm of inves-
Recessions
Non. Fi. Corporate Net Debt / GDP
4
3
2
2%
5%
8%
5
tors . The risk of a rapid downturn cannot be excluded, and it was even
mentioned in the discussions between central bankers, as illustrated
6
by the minutes of the FOMC meeting .
2
Since February 2020, the main M2 money supply aggregate has increased by 24
points of GDP, as much as between 2000 and 2019. See Wolf M. (2022) “As inflation
rises, the monetarist dog is having its day”, Financial Times, February 22.
3
Household loans and loans to non-financial companies, including net debt securities
th
issues. Source: US Federal Reserve, Financial Accounts of the United States, 4 quarter
2
4
021.
The year 2021 was a record year for issues of Collateralized Debt Obligations (CLO):
USD 150 bn in the United States according to IMF estimates. See International Moneta-
ry Fund (2021), Global Financial Stability Report, Ch. 1, October.
5
Ibid, p.20-21. In 2021, nearly 60% of LBOs represented more than six years of EBITDA
(
earnings before interest, taxes, depreciation, and amortization), the highest level since
1987
1992
1997
2002
2007
2012
2017
2022
2
6
007.
."A few [..] participants raised concerns that a relatively flat yield curve could
CHART 4
adversely affect interest margins for some financial intermediaries, which may raise
SOURCE: BEA, NBER. BNP PARIBAS
financial stability risks." Source: FOMC Minutes, 15-16 Dec. 2021, pp.4-5.
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