In order to curb inflation, the Fed raises its key interest rate again to 2.5%
In view of the further rise in prices in the United States, the American Federal Reserve announced on Wednesday, July 27th, that it would raise key interest rates again by 0.75 points. This is the fourth increase since March: 0.25 points in March, 0.5 points in May and 0.75 points in June.
The Fed’s monetary policy committee, the FOMC, started its meeting on Tuesday. At its last meeting in mid-June, the FOMC had already hiked rates to a range of 1.50% to 1.75%. This was the sharpest rise since 1994. This time, the 0.75-point rise translates into interest rates ranging between 2.25% and 2.50%. the “Currency Committee believes further rate hikes are appropriate”the Fed said in a statement.
Inflation at 9.1% yoy in June
“Recent spending and production indicators have slowed”assures the Fed and points to American consumption, the engine of the American economy, which accounts for almost three quarters of GDP. “However, job creation has remained robust in recent months and the unemployment rate is still low”She added.
The comments that Jerome Powell is able to make on the rates of increase proposed by the institution for the coming months are also being scrutinized and dissected by observers. “Mr. Powell will reiterate that the Fed views inflation as a plague, particularly for low-income households, and that policymakers are determined to bring it down.”anticipates economist Ian Shepherdson of Pantheon Macroeconomics.
The Fed said it would take a fall in inflation to consider halting rate hikes, or at least slowing the pace of rate hikes. “We expect this condition to be met by the September meeting”, adds Ian Shepherdson. However, the long-awaited economic slowdown to drive prices down could prove too severe and plunge the world’s largest economy into recession.
“Narrow possibility” of escaping the recession according to the IMF
The European Central Bank has also started to tighten its monetary policy, following many financial authorities. And the International Monetary Fund (IMF) said Tuesday it was important that these institutions continue to fight inflation. This is of course not easy and “Tighter monetary policy will inevitably have economic costs, but any delay will only exacerbate them”, according to the IMF. The Fed hopes a “soft landing”.
The good health of America’s economy should allow it to avoid a recession, according to Janet Yellen, Joe Biden’s Secretary of Commerce and Finance. The IMF is less optimistic. “Current environment suggests the likelihood of the United States escaping recession is slim”warned his chief economist Pierre-Olivier Gourinchas on Tuesday.
For the USA, the international institution only expects growth of 2.3% for this year, i.e. 1.4 points less than in its last forecast published in April. Gross domestic product growth for the second quarter will be released on Thursday. After a negative first quarter (−1.6%), it should be very slightly positive and thus protect the US economy from a recession for the time being.
Should it turn negative again, the world’s largest economy would slide into a technical recession. However, the actual definition of recession is a matter of debate in the country as this release approaches: is it two quarters of negative growth or a broader deterioration in economic indicators – which is currently not the case?