The US central bank raised rates on Wednesday to their highest level in nearly 15 years, and plans to continue raising them, seeking at all costs to curb high inflation, a task complicated by the threat of a recession.
The Federal Reserve (Fed), as expected, raised its key rate by 0.75 percentage point, now between 3.75% and 4.00%. This is its highest level since January 2008.
Institution officials say they anticipate “that further rate hikes will be appropriate,” according to a press release issued after a two-day meeting.
During his press conference, Federal Reserve Chairman Jerome Powell warned that it would take “time” before interest rate hikes slow inflation and that it would probably come with a slowdown economy.
Powell acknowledged that the Fed’s Monetary Committee (FOMC) was open “to moderating its rate hikes at the next meeting” in December, but was also quick to add that it was “very premature” to consider “a pause” in rate hikes.
Reflecting the perplexity of the markets, the indexes on Wall Street turned red, while bond rates, initially in decline, rose sharply, seeming to anticipate further tightening in the short term.
Reacting to this fourth solid rate hike in a row, White House spokeswoman Karine Jean-Pierre assured that “the actions of the Fed were helping to control inflation”. “This is part of our transition to stable and steady growth with low inflation,” she added.
Worrying inflation
With less than a week to go before the midterm elections, in which President Joe Biden risks losing his slim Democratic majority in Congress, inflation is now the main concern of American households.
In their decision voted unanimously, the members of the Monetary Committee indicate that the effects on the economy of the increases already made since March will have to be taken into account to establish the pace of the increases which will be decided at the next meetings. This was interpreted as a signal of a possibility of slower increases in the coming months.
It takes months for these Fed decisions to have an effect on the economy.
Inflation was still in September at 6.2% over one year, close to its highest levels in more than 40 years, according to the PCE index favored by the Fed, whose objective is to bring it down to 2%.
Another measure, the US Consumer Price Index (CPI) showed prices rose 8.2% year on year in September.
Wednesday’s policy rate hike is the sixth in a row since March, when it was between 0.00% and 0.25%, at its lowest, to boost consumption during the COVID crisis -19.
The Fed had started with the usual increase of 0.25 percentage points, before accelerating to 0.50, and finally, four times now, to 0.75 points.
“First signs” of a slowdown
But another danger threatens, since this voluntary slowdown in activity risks plunging the American economy into recession in 2023.
“I don’t think anyone knows if there will be a recession or not and if it happens, if it will be significant,” Mr. Powell said.
The AFL-CIO union was alarmed by this new increase in the cost of money, believing that it “would have a direct and harmful impact on workers and families”.
Jerome Powell had warned, at the end of the last meeting, in September, that there was no “painless way” to fight inflation durably.
Meanwhile, the United States recorded a quarter of growth between July and September, with +2.6% GDP growth at an annualized rate.
As for the employment market, it still displays iron health. Official figures for October will be released on Friday, but we already know that private employers created 239,000 jobs this month, much more than in September and even much more than expected, according to published figures. Wednesday.
The Democrats, who had focused their campaign on the right to abortion, when the Republicans played the card of the fight against inflation, are now trying to put forward their economic program in favor of the middle classes.
The credibility of the powerful institution is at stake, as after ensuring for months that high inflation would only be temporary, it has so far failed to slow it down.