The United States Federal Reserve (Fed) kept rates at their current level on Wednesday, but forecasts an additional increase by the end of 2023 and a higher level than expected in 2024, as the country’s economic growth this year should be twice as strong as it anticipated in June.
The monetary policy committee of the American central bank kept its main key rate in the range of 5.25 to 5.50%, in which it was after being raised at the end of July, during the last meeting. This is the highest level since 2001.
This decision was taken unanimously, but it does not mean the end of the cycle: Fed officials anticipate an additional rate hike by the end of the year. Rates which should then fall less quickly than expected, now expected at 5.1% in 2024, compared to 4.6% anticipated in their previous forecasts published in June.
Federal Reserve Chairman Jerome Powell, however, stressed that the movement in rates would depend on developments in the economic situation: “Stronger economic activity means we have to act harder on rates. »
The American central bank has in fact observed that the economy is doing much better than expected, and has doubled its forecast for growth of the gross domestic product of the United States for 2023, counting on 2.1% against only 1.0% in June. She describes the pace of progress as “solid” in the press release published at the end of her meeting, when she considered it only “moderate” during her previous meeting at the end of July.
For 2024, the Fed anticipates 1.5% growth, compared to 1.1% in previous forecasts.
“Time” still needed
Inflation forecasts remain essentially the same as those in June, at 3.3% for this year (compared to 3.2% previously), then 2.5% in 2024 (same as June), and 2.2% in 2025 (compared to 2.1%).
“It will still take time to bring inflation sustainably to 2.0%,” Fed Chairman Jerome Powell said at a press conference after the meeting.
Rates have increased 11 times since March 2022 – a very rapid pace intended to curb inflation not seen in more than 40 years. Since its peak in June 2022, it has slowed down significantly, despite further acceleration this summer. It stood at 3.7% over one year in August, according to the CPI index. The Fed favors the PCE index, which it wants to bring back to around 2%, and in July was 3.3% over one year. August data will be released on September 29.
The situation seems to be gradually rebalancing on the job market, after two years of labor shortage, which caused wages to soar. The unemployment rate rose to 3.8% in August, due to an influx of new workers, which could help cool inflation.
As for consumption, the engine of American economic growth, particularly vigorous since the start of the COVID-19 crisis, it seems to be showing first signs of weakness. But consumer spending remained “robust”, noted Jerome Powell. And from October, millions of Americans will see their purchasing power further reduced, as they will have to start repaying their student loans again, after a two and a half year break linked to the pandemic.
Strikes, politics and the price of gasoline
Will the American economy succeed in this “soft landing” desired by the Fed? Several clouds threaten it.
Starting with the unprecedented strike started on Friday by the powerful automobile union, the UAW, among the “big three” American manufacturers, GM, Ford and Stellantis (merger of the French PSA and the American Chrysler).
Another threat is that of the paralysis of the federal government apparatus if Republicans and Democrats in Congress do not agree on the government budget by the end of the month.
Jerome Powell also stressed that the rise in oil prices since this summer risks, if it continues, affecting consumer confidence.
The Fed’s board of governors was complete for the first time since February, after the departure of former vice-president Lael Brainard, who left to lead the White House economic advisers. She was replaced by Philip Jefferson, and the Fed welcomed its first governor of Hispanic origin, Adriana Kugler.