In the face of inflation, the Fed makes the largest rate hike since 1994

The Fed is putting the brakes on. The US central bank raised its key rates by three-quarters of a point on Wednesday, the biggest increase since 1994, and its president assured that the institution remained “determined” to fight against galloping inflation.

This is the third increase in a row in these rates, which are now in a range between 1.50 and 1.75%, and set the tone for loans granted to individuals and businesses. But we should expect other hikes of the same order in the coming months: meeting,” at the end of July, he added. Because bringing inflation back to around 2% is the priority. And most of the leaders of the institution see the rates rising, by the end of the year, to the range of 3.25 to 3.50%.

8.6% inflation over one year

The inflation figures for May, published on Friday, had the effect of a cold shower: the rise in prices has not slowed down, as it had been the case in April. It even reached a new record in 40 years, at 8.6% over one year. The Fed favors another measure, the PCE index, whose data for May will be released on June 30.

Federal Reserve officials also revised their inflation projections upwards on Wednesday, now expecting 5.2% in 2022 and 2.6% in 2023, when they forecast, in March, 4.3% and 2% respectively. .7%. Inflation remains “high, reflecting pandemic-related supply and demand imbalances, higher energy prices and broader pricing pressures,” the Fed said.

The institution recalls that the Russian invasion of Ukraine and the sanctions against Russia have created “additional upward pressure on inflation and are weighing on global economic activity”.

In addition, the anti-Covid-19 lockdowns in China have exacerbated problems on supply chains. All of this is slowing down the US economy.

Growth revised downwards

The Fed therefore expects economic growth to be weaker than expected this year in the United States, at 1.7%, against 2.8% previously. It also expects the unemployment rate to rise to 3.7% at the end of 2022 and 3.9% in 2023, when it previously saw it at 3.5%, its February 2020 level, just before the health crisis, the lowest in 50 years.

Wall Street welcomed the Fed’s announcement with relief and closed higher on Wednesday evening. The Fed is struggling all the more to control inflation as its credibility is at stake. Its officials have maintained for months that this rise in prices would only be temporary, and therefore began to tighten the screws only in March.

But controlling inflation without plunging the world’s largest economy into recession is proving particularly tricky. “Let’s be clear, we are not trying to induce a recession,” retorted Jerome Powell. “We’re trying to get inflation down to 2% (and keep) a strong labor market. »

He had estimated in May that controlling inflation without a recession remained achievable, albeit difficult. “Jay” Powell acknowledged that there was “always a risk of going too far or not far enough”, but that “the worst mistake (…) would be to fail (to control inflation), which does not is not an option”. According to Gregory Daco, chief economist of EY-Parthenon, “the American economy is heading for a mild recession at the end of the year”.

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