The US central bank (Fed) raised its reference rates by three-quarters of a point on Wednesday, the largest rise since 1994, and its president assured that the institution remains “determined” to fight galloping inflation.
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This increase “is unusually large,” Fed Chairman Jerome Powell told a news conference.
This is the third consecutive rise in these rates, which are now in a range between 1.50 and 1.75%, and set the standard for loans granted to individuals and companies.
But we can expect other hikes of the same order in the coming months: “From today’s perspective, a 50 basis point or 75 basis point hike looks very likely at our next meeting,” he added.
Because bringing inflation to around 2% is the priority. And most of the officials of the institution see the rates rise, at the end of the year, to the range of 3.25 to 3.50%.
The May inflation data, published on Friday, has had a cold shower effect: the rise in prices has not stopped, as it had in April. It even reached a new record in 40 years, with 8.6% in one year.
The Fed bets on another measure, the PCE index, whose data for May will be published at the end of the month.
Federal Reserve officials also revised upward their inflation projections on Wednesday, now expecting 5.2% in 2022 and 2.6% in 2023, when they forecast, in March, 4.3% and 2, 7%, respectively.
Inflation remains “high, reflecting pandemic-related supply and demand imbalances, higher energy prices and broader pricing pressures,” the Fed said.
The institution recalls that the Russian invasion of Ukraine and the sanctions against Russia have created “additional upward pressure on inflation and weigh down global economic activity.”
Additionally, China’s anti-COVID-19 lockdowns have exacerbated supply chain issues.
All of this is slowing down the US economy.
In addition, the Fed forecasts weaker than expected economic growth this year in the United States, at 1.7%, compared to 2.8% previously.
He also expects the unemployment rate to rise to 3.7% at the end of 2022 and 3.9% in 2023, when he previously saw it at 3.5%, its level in February 2020, just before the crisis. health, which was the lowest in 50 years.
Federal Reserve Credibility
Controlling inflation without plunging the world’s largest economy into recession is proving particularly difficult.
And fears are growing that the economy will contract.
“Let’s be clear, we are not trying to induce a recession,” replied Jerome Powell. “We’re trying to get inflation down to 2% (and maintain) a strong labor market.”
He had estimated at the previous meeting in May that controlling inflation without a recession was still feasible, if difficult.
More recently he has pointed out that this could be accompanied by a rise in unemployment. The country is facing a major labor shortage that is pushing companies to raise wages, a phenomenon that also contributes to fueling inflation.
“Jay” Powell acknowledged that “there is always a risk of going too far or not far enough,” but that “the worst mistake we could make would be to fail (to control inflation), which is not an option.”
The Fed is increasingly struggling to control inflation because its credibility is at stake, and its officials have argued for months that this price rise would only be temporary, so it was only in March that it began to tighten the screws.
Joe Biden’s Finance Minister Janet Yellen also admitted that she had not anticipated such a price increase.
The Fed is independent of the federal government, but Jerome Powell was recently hosted by Joe Biden at the White House, with Janet Yellen, for a rare interview devoted to inflation.
High inflation around the world, and its effects on the markets, are worrying to the point that the European Central Bank (ECB) held an extraordinary meeting on Wednesday, at the end of which it promised to act to calm tensions over sovereign debt . . Last week, it announced that it would start raising its rates in July.
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