Lhe US central bank announced on Wednesday an increase in 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 in 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.
Jerome Powell, the chairman of the powerful Federal Reserve, then clarified during a press conference that further increases of half a percentage point would be “on the table at the next two meetings”, i.e. the 14 -June 15 and July 26 and 27. He did not give any indication on the rest, without panicking Wall Street which ended in the green: the Dow Jones closing up 2.81% and the S&P 2.99%.
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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 more increases this year, or as many as meetings by the end of 2022. Since then, inflation has continued to climb. 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.
It is “absolutely essential to lower inflation”
It is “absolutely essential to lower inflation”, hammered Jerome Powell on Wednesday. The American Central Bank has two main missions: to ensure price stability and full employment. Jerome Powell repeated that with a very low unemployment rate (3.6%), a labor shortage, resignations by the millions each month and plethora of job offers, the labor market was extremely tense and at an unhealthy level. To attract candidates and retain employees, companies increase wages, which has the effect of fueling inflation. 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.
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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. Global growth slowed due to war in Ukraine and lockdowns in China. But Jerome Powell felt the US economy was strong. And, he said, “nothing … suggests that it is close or vulnerable to a recession”. The country’s Gross Domestic Product (GDP) contracted by 1.4% in the first quarter. But the Fed argues that “household spending and business fixed investment have remained high.”
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Additionally, “jobs gains have been robust in recent months,” the Fed notes. Employment figures for April will be released on Friday. For the time being, economists remain generally optimistic, also believing that consumption is holding up despite inflation. Finally, Fed leaders assured that they would be able to bring inflation back to their target of 2% without raising rates above 3% to avoid stalling demand. Jerome Powell finally estimated that the Fed had a “good chance” of achieving a “soft landing”, that is to say raising rates without precipitating the economy into a recession or causing a rise in unemployment, assuming that “economic and financial conditions evolve in a manner consistent” with central bank expectations. The half-point rate hike was passed unanimously.