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The Fed implements its biggest rate hike since 2000 to fight inflation – 05/04/2022 at 22:17

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

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

The US Central Bank on Wednesday announced a half percentage point hike in its key rate, the first screw of its magnitude since May 2000, in a bid to contain inflation, which is at a 40-year high.

The Monetary Policy Committee (FOMC) therefore raised these interest rates after a two-day meeting to a range between 0.75% and 1%. He also believes that “further hikes will be justified”, especially as the war in Ukraine and new lockdowns in China exacerbate price pressures and logistical problems.

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

He gave no indication of the rest, without panicking Wall Street, which ended in the green: the Dow Jones closed 2.81% and the S&P 2.99%.

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

However, it had expressed a 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. Exacerbated by the war in Ukraine, it reached a peak in March not seen since December 1981: +8.5% over a year, according to the CPI index.

– “Extremely tight” labor market –

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

The US Central Bank has two main tasks: to ensure price stability and full employment.

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

To attract candidates and retain employees, companies raise wages, fueling inflation.

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

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

In addition to raising policy rates, the Fed announced that it would begin deleveraging its balance sheet as of June 1, another important step in the normalization of monetary policy.

Specifically, the Fed will stop buying back securities and allow the bonds to mature, which will lead to a mechanical decline in its balance sheet.

The international context has changed since March. Global growth has 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’s… nothing to indicate it’s near or vulnerable to a recession.”

“Of course, given global events, the easing of fiscal policy effects and rising rates, economic activity could slow down in 2022, after “a year of exceptionally strong growth,” he stressed.

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

In addition, “job growth has been robust in recent months,” notes the Fed. Employment figures for April will be released on Friday.

For now, economists generally remain optimistic, including the view that consumption will hold up despite inflation.

Finally, Fed leaders assured they could bring inflation back to their 2% target without raising interest rates above 3%, in order to avoid stagnant demand. This, according to Jerome Powell, is a “neutral” bandwidth that cannot stimulate or slow economic growth.

“The Committee is particularly alert to the risks of inflation,” emphasizes the Fed.

Mr. Powell ultimately estimated that the Fed had a “good chance” of achieving a “soft landing”, i.e. raising interest rates without plunging the economy into recession or triggering a surge in unemployment. assuming “economic and financial conditions develop in a manner consistent with central bank expectations.

The half-point rate hike was passed unanimously.