The Fed raises its key rates in its fight against inflation

The American Central Bank (Fed) announced on Wednesday the raising of its key rates by half a percentage point, the first turn of the screw of this magnitude since May 2000, in an attempt to control inflation which is at its highest since 40 years.

The Monetary Policy Committee (FOMC) thus raised these interest rates to a range between 0.75% and 1%, after a two-day meeting. He also believes that “further increases will be justified”, especially as the war in Ukraine and the new confinements in China aggravate the pressure on prices and the problems of logistics.

In March, the Fed had started to raise rates, for the first time since 2018. But it had acted cautiously by raising them to a range between 0.25 and 0.50%, an increase of 0.25 points. percentage.

However, it had signaled its desire to make six other increases this year, or as many as meetings by the end of 2022.

Since then, inflation has continued to rise. Worsened by the war in Ukraine, in March it reached a peak not seen since December 1981: +8.5% over one year, according to the CPI index.

Fed Chairman Jerome Powell recently stressed that it was “absolutely essential” to restore price stability and to raise rates “quickly”.

The American Central Bank has two main missions: to ensure price stability and full employment.

In March, Jerome Powell estimated that the job market was at an “unhealthy” level.

Indeed, the unemployment rate is close to its pre-pandemic level (3.6% in March compared to 3.5% in February 2020). But companies have for months faced labor shortages and mass quits every month.

To attract candidates and retain employees, companies increase wages, which has the effect of fueling inflation.

Specter of a recession

In addition to raising key rates, the Fed announced that it would start reducing its balance sheet as of June 1, another major step in the normalization of monetary policy.

Concretely, the Fed will no longer buy back securities and will let the bonds mature, which will lead to a mechanical reduction in its balance sheet.

The international context has changed since March. The Fed notes in its press release that “general economic activity fell slightly in the first quarter” in the United States. The country’s Gross Domestic Product (GDP) even contracted by 1.4% in the first quarter.

But she also believes that “household spending and business fixed investment have remained high”.

The Fed adds that “job gains have been robust in recent months and [que] the unemployment rate has dropped considerably”.

All eyes are now on President Jerome Powell who is due to hold his press conference and will be in a hurry to give indications of the extent of the increases to come for this year, or even next year.

He will no doubt also be asked about the risks of recession.

For now, economists remain optimistic, also arguing that consumption is holding up despite inflation.

So far, Fed leaders still believe they can bring inflation back to their 2% target.

They had previously signaled that they would not need to raise rates to more than 3%, the challenge being not to stall demand. This is, they say, a “neutral” range that will neither stimulate nor slow down economic growth.

A majority of experts are now expecting another, even more aggressive hike of three-quarters of a percentage point at the June meeting, which would be a first since 1994.

“The Committee is particularly attentive to the risks of inflation”, insists the Fed.

The half-point rate hike was passed unanimously.

To see in video


source site-44

Latest