United States: the Fed raises its rate by three quarters of a point, the largest increase since 1994

United States: the Fed raises its rate by three quarters of a point, the largest increase since 1994
Written by madishthestylebar

The US central bank now expects inflation to be 5.2% this year, down from 4.3% projected in March, and will therefore make further hikes at upcoming meetings in 2022.

The central bank of the United States, surprised by the acceleration of inflation in May, at its highest for more than forty years, raised its key rate by 0.75 points on Wednesday evening. An increase of such magnitude had not been decided since 1994. It is true that at 8.6% over one year, the surge in prices worsened last month, contrary to the expectations of many economists .

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On May 12, Jerome Powell, head of the Federal Reserve, had again affirmed that an increase of 0.50 point in mid-June, followed by another of the same proportion at the end of July, would be justified in order to weigh on the cost of credit. in order to curb excessive demand for goods and services in the face of a supply that is still limited by multiple shortages. His opinion and that of his colleagues have changed over the past few days.

The door is open to further sharp increases

By raising the rate at which the Fed lets banks lend each other very short-term cash to 1.75%, they are now opening the door to further big rate hikes next month, or even in September as well. Between May 2020 (in the wake of the first confinement) until March 16, 2022, and a first increase, the rate had been kept barely above zero. Exceptional fact confirming the alarm of the monetary committee, as of Monday afternoon, a leak orchestrated by the most senior officials of the central bank allowed some press organs to reveal that an increase of 0.75 point and no longer 0 .50 point, was suddenly on the agenda. This acceleration is also justified by the fear of worsening inflation over the next few weeks.

Pessimistic view

The recent continued rise in energy prices argues for this pessimistic view. Further disruptions to supply chains due to re-containments in China and the persistence of a high level of labor shortages are also fueling it. The sharp rise in rents, signs of rising labor costs, inflationary expectations over the next year revealed by the Fed’s polls, are also added to the list of inflationary factors which, far from appease, worsen. Jerome Powell’s hope of seeing all these forces that have been fueling inflation for a year weaken in the spring is therefore once again dashed.

SEE ALSO – In the United States, the Fed makes the largest rate hike since 2000 to counter inflation

This disappointment further undermines the credibility of the Fed. “The Federal Reserve let inflation run wild and got out of control. Equity markets and credit markets have therefore lost confidence in the Fed.», commented Bill Ackman, head of the hedge fund Pershing Square, on the eve of the Fed’s decision. According to him, “confidence can be restored if the Fed carries out an aggressive intervention with 0.75 points then again in July, and commits (…) to quantitative shrinkage (a reduction in the amount of claims accumulated in the Fed’s balance sheet, editor’s note ), until inflation has been tamed”. His message was received.


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