Federal Reserve raises the largest rate since 2000 to combat inflation

US Central Bank (FRB) Chairman Jerome Powell at a press conference in Washington on May 4, 2022
US Central Bank (FRB) Chairman Jerome Powell (AFP) at a press conference in Washington, May 4, 2022

The Central Bank of the United States announced on Wednesday that it would raise the key rate by 0.5 percentage points to curb the highest inflation in 40 years. This is the first rotation of a screw of this size since May 2000.

Therefore, the Monetary Policy Committee (FOMC) raised these interest rates from 0.75% to 1% after a two-day meeting. He also believes that “further increases are justified,” especially as the war in Ukraine and the new confinement in China exacerbate price pressures and logistics problems.

Jerome Powell, chairman of the powerful Federal Reserve Board, said at a press conference that another half-percentage point increase would be “the next two meetings: June 14-June 15, July 26 and 27. It was revealed that it would be the day.

Without panicking Wall Street, where Dow Jones closed at 2.81% and S & P 2.99%, he showed nothing about the rest.

In March, the Fed began raising rates for the first time since 2018, but acted cautiously, rising 0.25 points in the range of 0.25 to 0.50%.

However, it showed that it hoped to have six others this year, or the same number of increases as the conference by the end of 2022.

Inflation has continued to rise since then. Exacerbated by the war in Ukraine, it reached a peak in March that had not been seen since December 1981. According to the CPI index, it is + 8.5% in one year.

Very tight labor market

The beating of “Jay” Powell on Wednesday is “absolutely essential to lower inflation.”

The Central Bank of the United States has two main missions to ensure price stability and full employment.

Powell said the labor market is at “very tense” and “unhealthy” levels due to a very low unemployment rate (3.6%), labor shortages, millions of resignations each month, and a large number of jobs. Repeated.

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

The Federal Reserve Board (FRB), the building of the US Central Bank in Washington, March 16, 2022.  The Fed plans to raise rates on May 4 to curb record inflation.
The Federal Reserve Board (FRB), the building of the US Central Bank in Washington, March 16, 2022. The Fed plans to raise rates on May 4 to curb record inflation. (SAUL LOEB / AFP / Archives)

In addition to raising key interest rates, the Federal Reserve has announced that it will begin lowering its balance sheet on June 1, another major step in normalizing monetary policy.

Specifically, the Fed no longer buys back securities and matures bonds, resulting in a mechanically reduced balance sheet.

Since March, the international situation has changed. The war in Ukraine and the blockade in China slowed global growth.

Can’t you see the recession?

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

“Of course, given the world’s events, the disappearance of fiscal policy effects, and rising interest rates, economic activity could slow down in 2022 after a’very strong year of growth’,” he points out. bottom.

The country’s gross domestic product (GDP) shrank 1.4% in the first quarter. However, the Fed claims that “household spending and corporate fixed investment remain high.”

“In the last few months, employment growth has been strong,” the Fed said. April employment statistics will be released on Friday.

For the time being, economists are generally optimistic and believe that consumption is holding up despite inflation.

Finally, Fed leaders were convinced that inflation could be returned to its target of 2% without raising interest rates above 3% to avoid stagnation in demand. According to Jerome Powell, this is a “neutral” range that cannot stimulate or slow economic growth.

“The Commission pays particular attention to the risk of inflation,” the Fed claims.

Powell finally estimated that the Fed had a “good chance” to achieve a “soft landing.” In a way that matches the expectations of the central bank. “

The increase in halving rate was unanimously approved.

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