The Federal Reserve (Fed) decided on Wednesday, June 15, to double its key rates, after inflation reached 8.6% in May. The US central bank increased its short-term rates by 0.75 points, an unprecedented increase since 1994. They are now in a range between 1.5% and 1.75%. In March, interest rates were still almost zero, oscillating between 0% and 0.25% since the start of the Covid-19 pandemic. Nevertheless, the institution chaired by Jerome Powell has allowed itself to be overwhelmed by the general surge in prices to levels not seen since 1981, while the labor market is close to overheating, with a minimum unemployment rate of 3.6%. .
The calamitous inflation figure for May, published on Friday 10 June, shocked the monetary institute. “We thought strong action was warranted at this meeting and we did it”said Mr. Powell, believing that ” the work market [était] extremely tense and inflation far too high. It considered a further rate hike, from 0.5 to 0.75 points, at its next meeting in July. By the end of 2022, the Fed still plans to double its rates, which would reach 3.4% and then peak at 3.8% in 2023. This is a considerable upward revision since the forecast of March, the institution predicting at the time short-term rates of only 1.9% and 2.8% at the end of 2022 and 2023.
This firmness was praised by the financial markets, which were increasingly critical of a central bank which they accused of always being behind schedule. Wall Street rebounded, with the tech-heavy Nasdaq rising 2.50%, while the S&P 500, which mirrors large companies, gained 1.46%. Ten-year rates were down significantly, from 3.48% to 3.28%. No one knows if this financial lull will last – in previous meetings, the markets have each time welcomed Mr. Powell’s balanced speech, before changing their minds and unscrewing over the following days – but the bank gives the feeling to reconnect with economic reality, that of high inflation, to be stemmed.
Trust in the consumer
Mr Powell still believes it will be possible to steer a soft landing for the economy. “We are not looking to cause a recession”, he assured. The central bank anticipates an unemployment rate of 4.1% for 2024, growth of 1.9% and inflation reduced to 2.1%, which would be equivalent to a controlled slowdown in activity. The boss of the Fed believes that an accident is possible in the event of an external event, beyond his control, such as the surge in the price of raw materials.
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