USA: the Fed ready for a new attack against persistent inflation

The US central bank is ready to launch a new offensive against inflation that refuses to come down, its president Jerome Powell having warned that the institution could accelerate the pace of rate hikes again and push them higher than expected.

“The most recent economic data is stronger than expected, suggesting that the final level of key rates is likely to be higher than expected,” the Fed Chairman told a Senate committee.

In other words, the economy remains overheated and the main Fed rate could continue to rise beyond 5.1%, the level at which Fed officials saw it stopping, according to their latest forecasts, which had were published in December.

These forecasts will be updated on March 21 and 22, at the next Fed meeting.

To combat high inflation in the United States, the Fed has been raising rates for the past year, from the range of 0 to 0.25% in which they were during the pandemic to support the economy through consumption, to , now 4.5-4.75%.

One of the governors of the Fed, Christopher Waller, had indicated on Thursday that he would support a hike in the key rate beyond 5.4% in the coming months, if inflation did not slow more quickly, and if the labor market remained tight.

Raising rates increases the cost of credit for households and businesses, weighing on their purchasing power, which has already been dented by inflation. The objective is to curb consumption to ease the pressure on prices.

“Ready to step up the pace”

After several very strong rate hikes, the Fed had recently adopted a slower pace, even returning after its last meeting on February 1 to the usual rate of hikes of a quarter of a percentage point.

But the tide could again be reversed, warned “Jay” Powell: “If all the data were to indicate that a faster tightening was justified, we would be ready to accelerate the pace of rate hikes”.

These statements have distraught wall streetwhich suddenly plunged into the red after these statements.

In addition, rates could remain high “for a while”, further warned the Fed Chairman.

“January’s data on employment, consumer spending, manufacturing output and inflation partly reversed the easing trends we saw in data just a month ago,” he said. he lamented.

Because despite the Fed’s efforts, consumption remained solid and inflation even rose again in January, to 5.4% over one year, according to the PCE index, favored by the Fed, and that it wants to bring back around 2%.

Another measure of inflation, the CPI index, which is a benchmark and on which pensions are indexed, for its part showed a slight slowdown, to 6.4% over one year, against 6.5% in December, accelerating however over one month for the first time since September, to 0.5% against 0.1%.

This should also weigh on employment, but the unemployment rate was, in January, at its lowest for more than 50 years, at 3.4%.

“We are seeing the effects of our policy actions on demand in the sectors of the economy most sensitive to interest rates. However, it will take time for the full effects of monetary restrictions to be felt, in particular on inflation,” said Jerome Powell.

“Although inflation has moderated in recent months, the process of reducing inflation to 2% will be long and probably bumpy,” said the head of the powerful US Federal Reserve.