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USA: new rate hike in sight at the Fed, perhaps even the largest since 1994

USA: new rate hike in sight at the Fed, perhaps even the largest since 1994
Written by madishthestylebar

Fed Chairman Jerome Powell during a press conference in Washington, May 4, 2022 (AFP/Jim WATSON)

The prospect has been stirring the markets since the beginning of the week: the American central bank, the powerful Fed, could announce on Wednesday the biggest increase in its key rates since 1994, in order to fight against inflation which is not weakening.

A few days ago, an increase of half a percentage point seemed certain.

But the inflation figures for May, published on Friday, had the effect of a cold shower: the rise in prices did not slow down, as it had been the case in April. It even reached a new record in 40 years, at 8.6% over one year.

Markets and some economists quickly concluded that rates could also rise more than expected, not more than half a percentage point (or 50 basis points), but three-quarters of a point (75 basis points). base).

If the Fed’s Monetary Committee (FOMC) were to take such a decision, it would be the biggest increase in key rates in more than 27 years.

“We are very hopeful that the Fed will only hike 50 basis points today, but the market and media frenzy over the past few days…obviously makes 75 basis points much more likely. “, regretted the economist Ian Shepherdson, of Pantheon Macroeconomics, in a note.

“This more aggressive action” is not necessary, he said, “because the forces that led to the recent inflation figures are already fading.”

– “Late” –

The decision will be announced Wednesday at 2:00 p.m. (6:00 p.m. GMT), after the meeting. The president of the institution, Jerome Powell, will hold a press conference at 2:30 p.m. (6:30 p.m. GMT).

The key rates, which are currently in a range of 0.75 to 1.00%, will thus be raised for the third time in a row.

Chart showing the evolution of the consumer price index in the United States since 1948 (AFP/)

Chart showing the evolution of the consumer price index in the United States since 1948 (AFP/)

Increases in key rates increase the cost of loans that commercial banks grant to their individual and professional customers.

“Clearly, the Fed accepts the accusation that it is behind the curve (of the rate hike) and is determined to catch up to avoid a further deterioration in inflation expectations,” the report said. AFP David Wessel, Fed specialist for the Brookings Institution, who leans for an increase of 75 basis points.

The Fed is struggling all the more to curb inflation because its credibility is at stake. Its officials have maintained for months that this price increase would only be temporary, and therefore began to tighten the screws only in March.

“With hindsight, (…) it would probably have been better to raise the rates earlier,” admitted Jerome Powell last month, during an interview with the Wall Street Journal.

Joe Biden’s Minister of Economy and Finance, Janet Yellen, also admitted that she had not anticipated such a price increase.

The Fed is independent from the federal government, but Jerome Powell was recently received by Joe Biden at the White House, with Janet Yellen, for a rare interview dedicated to inflation.

– Two new governors –

However, the central bank must be careful, by deliberately slowing down the economy, not to plunge it into recession. Jerome Powell had estimated last month that growth was needed, but not too much, to curb inflation.

A sign during a protest outside the Fed building in Washington on June 14, 2022 (AFP/Stefani Reynolds)

A sign during a protest outside the Fed building in Washington on June 14, 2022 (AFP/Stefani Reynolds)

He also pointed out that this could go through a small rise in unemployment, while the country is facing a major labor shortage which is pushing companies to raise wages, a phenomenon which is also contributing to fueling inflation.

During this meeting, Fed officials will also update their economic forecasts, the latest from March. They should revise those of inflation and unemployment upwards, and downwards those of GDP growth.

The monetary committee is meeting for the first time since Jerome Powell officially began his second term on May 23 and Lael Brainard became vice-president of the institution. This meeting also marks the arrival of two new governors, Lisa Cook and Philip Jefferson.

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