Fed raises rates by a quarter of a percentage point, tenth hike in a row

2023-05-03 22:08:03

By Le Figaro with AFP

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The Fed chairman also ruled out an interest rate cut this year despite the possibility of a “mild” recession because inflation “is not going to come down quickly.”

The American Central Bank (Fed) on Wednesday (May 3) raised its main key rate for the tenth time in a row since March 2022, by a quarter of a percentage point. The Fed has also decided to curb inflation despite signs that the economy is running out of steam and despite the recent banking crisis. The main Fed rate is now in a range of 5.00 to 5.25%, the highest since 2006, a decision taken unanimously, the institution announced in a press release published after the meeting of its monetary policy committee (FOMC).

Fed Chairman Jerome Powell told a press conference that“no decision on a break” in rising rates “was taken today”. However, he pointed out that the Fed no longer indicates in its press release that it anticipates additional hikes. “We took that part out. It’s a significant change“, specified Jerome Powell. The Fed Chairman also ruled out an interest rate cut this year despite the possibility of a “light” recession because inflation “not going to drop quickly”.

Signs of shortness of breath

Many market players are now waiting for a break in these rate hikes, which increase the cost of credit for households and businesses, and, by slowing down economic activity, should make it possible to ease the pressure on prices. Fed officials, in the statement, appear less firm on future rate hikes than in previous meetings. They specify that they will observe the effects of the successive decisions, and the delay with which they have an effect on the real economy, but also the “economic and financial developments”to decide whether or not to tighten further, in order to bring inflation down to 2.00%.

This marks a change in tone from previous meetings, when they anticipated the need to continue raising rates. The banking crisis provided unexpected support for the Fed’s fight against inflation: “the tightening of credit conditions for households and businesses is likely to weigh on economic activity, hiring, and inflation”underlines the Fed in its press release, hammering that “The US banking system is strong and resilient.” And, while it was still resisting, the American economy is multiplying the signs of slowing down, long awaited and finally visible. Last week, first-quarter growth came in at 0.3% from the last three months of 2022 and just 1.1% annualized.

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And the probability of a recession, more marked than initially expected, is widely anticipated by the markets. “Our data suggests that monetary tightening and recent strains in the banking system will lead to a mild recession, though stronger than we had anticipated so far,” underlined the chief economist of Oxford Economics, Ryan Sweet, interviewed by AFP. The fragility of certain banking establishments came back to the fore with the fall of the regional bank First Republic, finally bought over the weekend by JPMorgan Chase, the number one in the sector. The concern about the solidity of these medium-sized banks remains strong, several of them saw their title fall on Wall Street on Tuesday.

“Fear is back”

“Fear is a very powerful feeling on Wall Street. When he walks in the door, logic goes out the window.commented Adam Sarhan of 50 Park Investments. “The Fed must consider” these banking difficulties “as a game-changing event”said Karl Haeling of LBBW, and no longer consider that the banks bear the costs of cases “isolated from mismanagement”. Because these banks are suffering in particular from the rise in rates, which set the day-to-day cost of the money that institutions lend to each other. It has gone in just over a year from a range between 0 and 0.25% to values ​​between 4.75 and 5% now.

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However, while inflation fell sharply in March, core inflation (excluding food and energy prices) barely slowed and is now higher than inflation itself. Jerome Powell, has been repeating it for months, bringing US inflation back to its 2% target will be a long and difficult but necessary effort because long-term inflation would have even more harmful consequences for the economy, according to him. . Between May and December, the Fed had, in the face of persistent inflation, raised its rates at a pace not seen since the beginning of the 1980s, opting for two unusual increases of half a point, and even, on four occasions, of three – quarter points.