The US Federal Reserve has decided to make full employment a priority and announced that interest rates will remain extremely low that there will not be enough jobs in the United States and as long as there is unemployment. Nicolas Barré takes stock of a current economic issue.
This is good news for anyone looking for credit: interest rates are going to stay very low, possibly for years to come.
It's not every day that Nicolas Barré talks about monetary policy, but it's not every day that the most powerful central bank in the world, that of the United States, puts an end to a policy it was following for 30 years. She decided that the number 1 objective of a central bank, the bank that makes money, must be full employment. This is indeed what the US Federal Reserve announced on Thursday and this change in doctrine is historic.
What does that mean concretely?
This means that as long as there aren't enough jobs in the United States, as long as there is unemployment, the central bank will keep interest rates very low, close to zero. Even if that must translate into a little inflation, which is normally, historically, always, the nightmare of central banks. Very low rates is good news for Americans first, of course, it means the United States has entered an era of very cheap credit that will last a long time. But it also puts considerable pressure on other central banks, in particular the European Central Bank, which has never made employment an objective because it is not provided for by the European treaties. We can see that the world has changed and that the Covid crisis is reshuffling the cards and leading those who are in charge of steering the economy to review their doctrine.
Many dogmas presented as intangible are being blown up.
Yes, this virus blows up all the frames. Europe blew up the 3% government deficit rule, the debt is soaring but no one seems to worry too much about it and in the wake of the American central bank, everything is happening as if the world had now entered a very long period of virtually free credit. It is not certain that all of this will produce miracle results. It's been 20 years since Japan adopted zero interest rates and that has not restarted the machine. But it is a country which knows full employment and by putting this objective in mind, the head of the American central bank also meant that there is no strong economy without a job for everyone: " full employment is an inclusive goal, ”he said, citing minorities and the low-skilled who must also find their place in the labor market. This challenge arises in all developed economies.