A senior official of the American central bank (Fed) said Thursday that he was open to the idea of a one percentage point increase in its key rate, which would be a first for more than 30 years, at a time when the institute puts all its energy into calming galloping inflation.
At the beginning of July, Christopher Waller repeated that he was in favor of a further increase in key rates of three-quarters of a percentage point being decided upon at the meeting of the Fed’s Monetary Policy Committee (FOMC), scheduled for July 26 and 27.
But on Wednesday, the Labor Department reported that consumer price inflation accelerated further in June in the United States, to 9.1% year on year.
While one of the Fed’s missions is to ensure that inflation does not soar, it is “a first-order disappointment”, Waller said Thursday, according to the text of a speech that he had to say.
Raising rates by 0.75 percentage points in this context would mean reaching a “near neutral” level, in the sense that this change “would not stimulate or restrict demand”, he argued. And as things stand, he would still vote that way.
But if, between now and the next FOMC meeting, indicators on retail sales or real estate are higher than expected, “that would make me lean towards a bigger increase […]insofar as this [montrerait] that demand is not slowing fast enough to bring inflation down,” he added.
Don’t cause a recession
The Fed began in March to raise key rates vigorously to curb demand and calm this rise in prices, one of its missions being to ensure that inflation does not run rampant. It even raised them by three-quarters of a percentage point in June, its biggest increase since 1994.
These rates, which set the tone for loans granted to individuals and businesses, are now in a range of between 1.50% and 1.75%.
The Fed is scrambling to rein in inflation as its credibility hangs in the balance, with officials claiming for months that rising prices — fueled by the strong recovery in activity, problems at the supply and, more recently, the spike in energy prices — would only be temporary.
Current inflation, at its highest since 1981, threatens growth as consumption is the main driver of the US economy.
It also weighs down the popularity of the American president, Joe Biden, a few months before an important electoral deadline, that is to say the renewal of a large part of the elected representatives of Congress.
But the Fed must also be careful not to push the economy into recession with rates at such a level that they would discourage individuals and businesses from borrowing.
After the release of the price numbers on Wednesday, the scenario of a one point rate hike at the next Fed meeting gained traction. This would be a first since at least 1990.
The Fed did not set key rates directly before, but aimed for a target, and the last increase of at least a percentage point in this objective, decided under Paul Volcker, dates from 1980.
“With such high inflation, it seems virtuous to tighten [la politique monétaire] quickly,” as it would boost confidence in the Fed’s ability to bring inflation down, Waller said.
The Bank of Canada opted Wednesday for a one-point increase in its key rate to 2.5% in order to fight against inflation, which stood at 7.7% in May in the country.
The senior official also considered that while certain indicators suggested that “the risks of a recession had increased”, such a scenario remained “avoidable”, particularly given the strength of the job market.
The number of vacancies, compared to the current low unemployment rate (3.6% in June), is very high, he recalled.