(Washington) The U.S. Federal Reserve (Fed) raised interest rates by three-quarters of a percentage point on Wednesday, its biggest hike since 1994, as the central bank steps up efforts to tackle the fastest-growing inflation in four decades.
Updated yesterday at 6:20 p.m.
What you need to know
- North American stock indices rose immediately after the Fed’s announcement.
- Economists from RBC and CIBC believe that the Bank of Canada is likely to imitate the Fed by raising its key rate by 75 basis points next month.
- Desjardins believes that the Fed is “decidedly ready to strike hard blows to bring inflation under control”. Further sharp increases in key rates are to be expected.
- “Let’s be clear, we’re not trying to induce a recession,” Fed Chairman Jerome Powell said reassuringly.
The Press
The sharp rise in rates, which markets were expecting, underscored that Fed officials were determined to rein in rising prices, even if it comes at a cost to the economy.
In a sign of the impact the Fed’s policies are expected to have on the economy, officials have predicted the unemployment rate will hit 3.7% this year and 4.1% in 2024, and growth will slow significantly as that politicians would sharply increase borrowing costs and stifle economic demand.
The Fed’s key rate is now set in a range of 1.5% to 1.75% and policymakers have hinted that more rate hikes are to come. In a new round of economic projections, the Fed expects interest rates to reach 3.4% by the end of 2022. This would be the highest level since 2008, and officials have estimated that its key rate will reach 3.8% at the end of 2023. These figures are significantly higher than previous estimates, which predicted a maximum rate of 2.8% next year.
Fed officials have also recently indicated that they plan to cut rates in 2024, which could be a sign that they think the economy will weaken to the point that they need to reorient their policy approach. The main takeaway from the Fed’s economic forecast, which it released for the first time since March, is that officials have become more pessimistic about their chances of letting the economy weaken smoothly.
To underscore this, policymakers deleted a sentence from their post-meeting statement that predicted inflation could be subdued as the labor market remained strong — a sign they think they may need to curb job growth to control inflation.
“Inflation remains elevated, reflecting pandemic-related supply and demand imbalances, rising energy prices and broader price pressures,” the Fed reiterated in its statement. after meeting.
One official, Kansas City Regional Fed Chair Esther George, voted against the rate hike. Although M.me George had always worried about high inflation and had always been in favor of raising interest rates, she would have preferred a half point increase in this case.
Change of direction
Until the end of last week, markets and economists generally expected a rise of half a point. The Fed had raised rates by a quarter point in March and half a point in May, and indicated that it planned to continue raising them at that rate in June and July.
But central bankers have received a series of bad news on inflation in recent days. The consumer price index rose 8.6% in May from a year earlier, the fastest pace since late 1981.
Although the Fed’s favorite gauge of inflation — the measure of personal consumption expenditure — is slightly lower, it’s still too high to be comfortable with. And consumers are starting to expect faster inflation in the months or even years to come, based on survey data, which is a worrying trend.
Economists believe that expectations can be “self-fulfilling,” causing people to demand wage increases and accept price hikes in a way that perpetuates high inflation.
It is increasingly unlikely that the Fed will be able to quickly and smoothly cool inflation to the 2% annual rate it is targeting on average and over the long term.
The central bank has worked to put the economy on a more sustainable path without precipitating it into a crushing recession that would cost jobs and dampen growth. Policymakers have hoped to raise borrowing costs to dampen demand just enough to balance supply and demand without inflicting major pain. But as the price increases continue, it becomes increasingly difficult to achieve this “soft landing”.
Interest rate hikes from the central bank are already rippling through the wider economy, pushing up mortgage rates and helping the housing market begin to cool. Demand for other consumer goods is showing signs of slowing, as money becomes more expensive to borrow, and businesses may scale back expansion plans.
The aim is to dampen demand enough to allow supply — which remains constrained by factory closures, shipping issues and labor shortages around the world — to catch up.
But it’s hard to rein in demand without hurting growth, not least because consumption makes up the bulk of the US economy. If the Fed has to drastically restrict spending in order to rein in rising prices, it could lead to job losses and business closures.
Markets are increasingly concerned that central bank policy is causing a recession. Stock prices have fallen and bond market signals are flashing red as Wall Street traders and economists increasingly expect the economy to tip into a recession, possibly as early as the year next.
This article was originally published in The New York Times.