The Fed makes the largest rate hike since 2000 to counter inflation – 05/04/2022 at 22:17

The Fed makes the largest rate hike since 2000 to counter inflation - 05/04/2022 at 22:17


US Central Bank (Fed) Chairman Jerome Powell during a press conference in Washington on May 4, 2022 (AFP/Jim WATSON)

The American Central Bank announced on Wednesday an increase in its key rates by half a percentage point, the first turn of the screw of this magnitude since May 2000, in an attempt to control inflation which is at its highest in 40 years.

The Monetary Policy Committee (FOMC) thus raised these interest rates to a range between 0.75% and 1%, after a two-day meeting. He also believes that “further hikes will be justified”, especially as the war in Ukraine and the new confinements in China aggravate the pressure on prices and the problems of logistics.

Jerome Powell, the chairman of the powerful Federal Reserve, then clarified during a press conference that further hikes of half a percentage point would be “on the table at the next two meetings”, i.e. the 14 -June 15 and July 26 and 27.

He did not give any indication on the rest, without panicking Wall Street which ended in the green: the Dow Jones closing up 2.81% and the S&P 2.99%.

In March, the Fed had started raising rates, for the first time since 2018. But it had acted cautiously by raising them to a range between 0.25 and 0.50%, an increase of 0.25 points. percentage.

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

Since then, inflation has continued to rise. 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.

– “Extremely tight” labor market –

It is “absolutely essential to lower inflation”, hammered “Jay” Powell on Wednesday.

The American Central Bank has two main missions: to ensure price stability and full employment.

Mr. Powell repeated that with a very low unemployment rate (3.6%), a labor shortage, resignations by the millions each month and plethora of job offers, the labor market was “extremely tense” and at an “unhealthy” level.

To attract candidates and retain employees, companies increase wages, which has the effect of fueling inflation.

The U.S. central bank building, the Federal Reserve (Fed), in Washington on March 16, 2022. The Fed is expected to raise rates on May 4 in an attempt to control record inflation.  (AFP / SAUL LOEB)

The U.S. central bank building, the Federal Reserve (Fed), in Washington on March 16, 2022. The Fed is expected to raise rates on May 4 in an attempt to control record inflation. (AFP / SAUL LOEB)

In addition to raising key rates, the Fed announced that it would start reducing its balance sheet as of June 1, another major step in the normalization of monetary policy.

Concretely, the Fed will no longer buy back securities and will let the bonds mature, which will lead to a mechanical reduction in its balance sheet.

The international context has changed since March. Global growth slowed due to war in Ukraine and lockdowns in China.

– No recession in sight? –

But Jerome Powell said the US economy was “strong”. And, he said, there is…nothing to suggest that it is near or vulnerable to a recession.”

“Of course, given the events in the world, the disappearance of the effects of fiscal policy and the rise in rates, economic activity could be slower” in 2022, after “a year of extraordinarily strong growth”, he pointed out.

The country’s gross domestic product (GDP) contracted by 1.4% in the first quarter. But the Fed argues that “household spending and business fixed investment have remained high.”

Additionally, “jobs gains have been robust over the past few months,” the Fed notes. Employment figures for April will be released on Friday.

For the time being, economists remain generally optimistic, also believing that consumption is holding up despite inflation.

Finally, Fed leaders assured that they would be able to bring inflation back to their target of 2% without raising rates above 3% to avoid stalling demand. This is, according to Jerome Powell, a “neutral” range that can neither stimulate nor slow down economic growth.

“The Committee is particularly attentive to the risks of inflation”, insists the Fed.

Mr. Powell finally estimated that the Fed had a “good chance” of achieving a “soft landing”, that is to say raising rates without precipitating the economy into a recession or causing a rise in unemployment, assuming that “economic and financial conditions develop in a manner consistent” with central bank expectations.

The half-point rate hike was passed unanimously.

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