In the fight against inflation, the American central bank is about to strike hard – 03/05/2022 at 21:32

In the fight against inflation, the American central bank is about to strike hard - 03/05/2022 at 21:32

The building of the American central bank, the Federal Reserve (Fed), in Washington. Photo taken on April 13, 2022 (AFP / Stefani Reynolds)

The US central bank’s Monetary Policy Committee began its two-day meeting on Tuesday after which it will announce, barring any surprises, a hike in key rates of half a percentage point, the first of this magnitude since May 2000, in an attempt to control record inflation.

The meeting “started at 10 a.m. (2 p.m. GMT) as planned,” a spokeswoman for the central bank (Federal Reserve, Fed) told AFP.

Inflation has been increasing month after month for a year in the United States. Worsened by the war in Ukraine, in March it reached a peak not seen since December 1981: +8.5% over one year, according to the CPI index.

In March, the Fed began raising rates for the first time since 2018. But then it started the movement cautiously, raising 0.25 percentage points to bring rates to a range between 0 .25 and 0.50%.

It had also signaled its desire to make six other increases this year, or as many as meetings by the end of 2022.

With price pressure unabated, Fed Chairman Jerome Powell has since acknowledged that it is “absolutely essential” to restore price stability and raise rates “rapidly”.

The American central bank has two main missions: to ensure price stability and full employment.

On the employment front, the unemployment rate fell to 3.6% in March, close to its level before the Covid-19 pandemic (3.5%). Data for the month of April will be released on Friday.

Businesses have been facing labor shortages and mass resignations for months. In March, another 4.5 million people left their jobs, while the number of job offers soared to 11.5 million, a record, according to the statistics office.

As a result, companies increase wages to attract candidates and retain employees, which has the effect of fueling inflation.

The prospect of a rate hike by the Fed caused a stir in the markets on Monday. US 10-year bond yields briefly touched the 3% threshold at midday for the first time since late 2018.

– Risk of a recession –

In addition to interest rates, the central bank should mark the start of the reduction of its balance sheet, another major step in normalization.

Investors are particularly anticipating Jerome Powell’s press conference on Wednesday, on the lookout for comments on how interest rates could rise beyond that meeting.

So far, the Fed has clearly telegraphed its plans, announcing upfront its willingness to aggressively tighten from the May meeting, which has helped limit market volatility.

A majority of economists are now pricing in another even more aggressive three-quarters percentage point hike at the June meeting, which would be the first since 1994.

The Fed is also likely to begin trimming its $9 trillion asset portfolio from June, at a much faster pace than in a previous reduction in its holdings five years ago.

The challenge is to moderate inflation without tipping the world’s largest economy into recession.

Concerns about this have increased in recent weeks as growth wanes. The gross domestic product of the United States even contracted by 1.4% in the first quarter, on an annual basis.

The experts want to be reassuring, noting that consumption, the historic engine of American growth, is holding up.

But against a backdrop of war in Ukraine, economic slowdown in China and Europe, a recession no longer seems a distant risk.

Fed leaders currently estimate that they will be able to bring inflation back to their 2% target without raising rates above 3% to avoid stalling demand. According to them, this is a “neutral” range that will neither stimulate nor slow down economic growth.