It was a firework display on Wall Street: The Nasdaq, the tech-rich index, rose 4.06% on Wednesday, July 27, while the S&P 500, which represents large American companies, gained 2.62%: In Question come the reassuring words of Jerome Powell, the Federal Reserve (Fed, central bank) President about the national economy, giving hope that the worst of inflation is over and the recession can be avoided.
As expected, the Monetary Policy Committee decided to raise the Fed’s key interest rate by 0.75 points for the second time in a row. The short-term interest rate is now in a range between 2.25% and 2.5% after being just above zero in March and since the start of the coronavirus pandemic. “The labor market is extremely tight and inflation is far too high”explained Mr. Powell.
However, the institution’s president has not ruled out a slowdown in monetary tightening. “At some point you have to slow down. We could once again make unusually strong gains [en septembre], but it’s by no means a decision we’ve made. We will be data driven. » By the next meeting in September, the central bank will have unemployment and inflation figures for August and September. It will then know if it can slow the credit crunch.
Markets expect the price surge to peter out on its own as 10-year rates are down at 2.8% while inflation is over 9%. Long-term interest rates hit 3.5% in June when the May figures were released just before the last Fed meeting.
There are positive signals: The costs of raw materials, especially energy, are falling – a gallon of gasoline (3.8 liters) costs just $4.30 (4.20 euros) after over $5. The price madness in air transport is ebbing away. In the US there is no inflation-salary spiral, which undermines purchasing power but gives hope for a way out of inflation.
Most notably, Mr. Powell noted a slowdown in demand: American consumers, whose morale is at an all-time low, have reverted to staples. They are drawing on their savings, which have been hit by the stock market collapse and the end of government aid programs related to the health crisis. Due to rising mortgage interest rates, the real estate market is on the verge of a trend reversal. Employment shifts slightly in favor of companies. Finally, business investment appears to have slowed in the second quarter.
You still have 49.19% of this article to read. The following is for subscribers only.