USA: in the face of inflation, the Fed is fighting back with a new rate hike of 75 bp

The Federal Reserve is “firmly committed to reducing inflation to 2% and will remain so until the job is done,” insists President Powell.

The US central bank (Fed) gave its monetary policy a strong new twist on Wednesday, in the face of still too high inflation, and warned it should tighten further, which will be painful for families.

The powerful US Federal Reserve raised its benchmark interest rate by three quarters of a percentage point, bringing it to a range of between 3.00 and 3.25%.

This is the third consecutive time that the Monetary Policy Committee (FOMC), the decision-making body of the Fed, has made an increase of this magnitude. It started in March with a customary quarter-point increase, and then increased by half a point in May.

And the movement is expected to continue into 2022, until the key rate has increased by another percentage point.

Because the Fed is “firmly determined to bring inflation to 2% and it will stay that way until the job is done,” hammered its chairman, Jerome Powell, at a press conference Wednesday. He also warned about the risks that could be posed by “a premature easing of monetary policy”.

The increase in the key rate increases the interest rates of the various loans to individuals and professionals, in order to slow down economic activity and thus ease the pressure on prices.

“We need to realign supply and demand. And our way to do it is to slow the economy down, ”explained Jerome Powell.

Mortgage rates, for example, have risen since the beginning of the year and just surpassed 6% for a 30-year loan, for the first time since 2008. This is driving down sales in this industry, which had shown insolent good health since the start of the pandemic.

No “painless” way to deal with inflation

But bringing back the inflation in the nails will not be painless, the president of the institute warned.

“If we want to go back to a very strong labor market period, we have to put inflation behind us. I wish there was a painless way to do it, but there isn’t, ”Powell explained.

Thus the Fed, which also updated its forecasts for the American economy, now expects GDP growth to be almost zero in 2022 (+ 0.2%), when it counted, in June, on + 1.7%. It then sees it rebound to 1.2% in 2023, less strong, however, than the 1.7% growth expected in June for next year.

Inflation forecasts, on the other hand, remain close to what was expected in June: 5.4% in 2022 (vs. 5.2%) for PCE inflation, and then sharply slowing down in 2023, to 2.8% (against 2.6% previous).

The Fed favors this inflation index, which in July stood at 6.3% over one year, according to the latest data available, to the CPI index, which refers in particular to the indexation of pensions. It is true that in the United States it slowed down in August, thanks to the drop in gasoline prices, but, at 8.3% over one year in August, it still showed strong pressure on prices, with generalized inflation.

Increase in unemployment

This deliberate slowdown of the economy is very complicated, because excessive braking could plunge the United States into the recession that is already hovering over the entire global economy.

However, the healthy state of the labor market gives the Fed some leeway to act aggressively.

The current unemployment rate, at 3.7%, is one of the lowest in the last 50 years and there are not enough workers to fill all the vacancies. The Fed expects an increase, to 3.8% on average in 2022 (3.7% previously forecast), then to 4.4% in 2023 (versus 3.9% forecast in June).

Allowing inflation to take hold, however, would involve even more painful measures for households and businesses, as was the case 40 years ago, after years of rising prices, sometimes close to 15%.

The US central bank, like its counterparts around the world, is trying to curb inflation caused by supply chain disruptions linked to Covid-19 and exacerbated by rising energy and food prices with the war. in Ukraine.

Many are meeting this week, including the Bank of England (BoE) and the Bank of Japan (BoJ) on Thursday. On Tuesday, Swedish bank Riksbank created the surprise with an unprecedented one point hike.

In early September, the European Central Bank (ECB) had raised rates by three quarters of a percentage point, unprecedented.

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