Faced with inflation that continues to climb in the United States, even becoming Joe Biden’s economic priority, the American central bank is preparing to raise its key rates for the third time on Wednesday, and could accelerate the movement.
The monetary policy committee, the decision-making body of the Fed, meets on Tuesday and Wednesday. A rate hike of half a percentage point, or 50 basis points, seems certain.
But it is now the hypothesis of a stronger increase, of three quarters of a percentage point, or 75 basis points, which agitates the markets. Such an increase would be a first since 1994.
“Markets have started pricing in the risk (of a rise) of 75 basis points at the Fed meeting next week,” Shaun Osborne of Scotiabank told AFP.
The reason: inflation. It had begun a timid slowdown in April, giving hope that the worst was over.
But the May figures, released on Friday, sounded like a stark reality check, with a further acceleration and a new high in 40 years, at 8.6% year on year and 1.0% month on month, according to the ICC index.
The Fed favors the PCE index, released later in the month, which also slowed in April, to 6.3% year on year, but remains well above the 2% target, considered healthy for the economy .
Shaun Osborne, however, is skeptical about the hypothesis of a sharp rise that could panic the markets. But “it’s obviously a risk,” he warned, however.
On Friday, a quarter of market participants were expecting a sharp 75 basis point rise, and three quarters were anticipating a 50 basis point rise, similar to the last meeting in early May, according to CME Group’s futures product valuation. . On Saturday, however, just 3.6% believed the Fed would raise rates by 75 basis points.
– Rather in September –
“Some people think the Fed could offer a surprise 75-point hike at the June meeting. Never say never under these circumstances, but we think it remains very unlikely,” said Krishna Guha, economist for Evercore. , an investment advisory firm.
According to him, “if the Fed opens up the possibility of a movement of 75 basis points, (…) it will most likely be for September”.
By raising its key rates, the Fed encourages commercial banks to offer more expensive loans to their customers, who are therefore less inclined to consume.
“The Fed must reduce demand to respond to a world in which supply is limited,” commented economist Diane Swonk, of Grant Thornton, in a tweet.
The institution had lowered its rates urgently in March 2020, to support the economy through consumption, in the face of Covid-19 which was spreading in the United States.
They remained in a range of 0 to 0.25% for two years, before being raised by a quarter point in March 2022, then by half a point in May, and now range between 0, 75 and 1.00%.
– Recession risk –
But the Federal Reserve must now engage in a delicate balancing act, to slow down inflation without weighing too much on economic growth.
“The more consumers spend, the more the Fed must tighten its policy; this increases the risk of recession”, warns Yelena Maleyev, economist also for Grant Thornton.
Because the forced slowdown in consumption is likely to weigh on the American economy, raising fears of a recession or “stagflation”, that is to say a prolonged period of weak growth and high inflation. Unemployment could rise again.
Fed Chairman Jerome Powell was received at the White House at the end of May by Joe Biden for a rare interview dedicated to the fight against inflation.
Another major step in the normalization of monetary policy, the Fed began on June 1 to reduce its balance sheet, after having, during the Covid-19 pandemic, bought securities to flood the market with liquidity and allow it to continue to operate. .
On Tuesday and Wednesday, the Fed will also update its forecasts for inflation, growth, and unemployment.
This meeting will also be the first since Jerome Powell officially began his second term on May 23 and Lael Brainard became vice-chairman of the Fed. And it will mark the arrival of two new governors, Lisa Cook and Philip Jefferson.