Fed Chair Jerome Powell at the July 27 press conference in Washington (AFP/MANDEL NGAN)
With inflation not slowing in the United States, the US Federal Reserve (Fed) hit hard on Wednesday, raising interest rates sharply again in a bid to curb inflation while ensuring it can avoid a recession.
The Fed’s Monetary Affairs Committee (FOMC) hiked interest rates by three-quarters of a percentage point, in line with markets’ expectations. These rates are now between 2.25% and 2.50%.
“Inflation is way too high,” said Fed Chair Jerome Powell, acknowledging that the most recent inflation barometer of 9.1% in June, a new high in more than 40 years, “was even worse than that reported by Fed members expected”.
The US Federal Reserve (Fed) has announced a fourth straight hike in interest rates and plans to continue this move amid persistently very high inflation (AFP / Jim WATSON)
This is the fourth consecutive increase: a quarter point in March, half a point in May and three quarters of a point in June – the largest increase since 1994.
And “the Monetary Committee believes that further rate hikes will be appropriate,” the Fed commented in a press release.
Mr Powell warned that another “unusually large” hike may be required at the next monetary meeting in September and that at that point it will “at some point be appropriate to slow the move”.
The Fed usually operates in quarter-point hikes.
– start of deceleration –
This new rate increase was decided unanimously by the twelve voting members. The Monetary Committee was full for the first time since 2013, with no vacant seats.
The aim of these interest rate hikes is to make credit more expensive in order to curb consumption and investment and ultimately reduce price pressure.
Wall Street took a positive view of this determination and ended Wednesday with a very sharp rise.
The dollar fell against major currencies.
“Recent spending and production indicators have slowed down,” admits the Fed, referring in particular to consumption, the locomotive of the American economy.
Development of the key interest rate of the FED since 1985 (AFP / )
“However, job creation has remained robust in recent months and the unemployment rate is still low,” also comments the FOMC, which claims to be “very vigilant about inflationary risks”.
The Fed is hoping for a “soft landing” but the economic slowdown it will take to push prices lower may prove to be too much.
“We’re not trying to create a recession,” the Fed chair defended, assuring that the United States is not currently in a recession.
The development of the gross domestic product (GDP) in the second quarter will be published on Thursday. After a negative first quarter (-1.6%), it could be slightly positive.
– No recession –
“We believe there is a way to bring down inflation while supporting a strong labor market,” he said, urged by reporters to ascertain whether the GDP of the world’s largest economy is not on the brink of contraction.
“Again, I don’t think the US economy is in recession right now,” the official added, but stressed “a slowdown in spending.”
“We may see a slight change in the labor market, but this is just the beginning,” he warned. The very low unemployment rate remained stable at 3.6% in June and job creation, still strong, slowed.
Fed Chair Jerome Powell in Washington on June 27, 2022 (AFP/MANDEL NGAN)
“Our aim (…) is to bring down inflation and achieve a so-called ‘soft landing’, which means that unemployment does not rise significantly,” Mr Powell said.
However, the IMF is less optimistic. “The current environment suggests that the United States is unlikely to emerge from recession,” warned its chief economist Pierre-Olivier Gourinchas on Tuesday.
The institute sharply lowered its growth forecast for the United States in 2022 and now expects just 2.3%.
Asked about the Fed’s initial slowness in reacting to rising prices, Mr. Powell defended himself: “The situation has developed very unexpectedly for all of us (…). Prices earlier.”
“Many central banks hiked rates three months earlier and it had no effect,” he said.