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The Fed raises rates again by three-quarters of a point

Faced with inflation that is not slowing down in the United States, the American central bank (Fed) hit hard on Wednesday with a new sharp increase in its key rates in an attempt to curb inflation. However, she assured that she could avoid a recession.

The Fed’s Monetary Committee (FOMC) raised its key rates by three-quarters of a percentage point, as markets expected. These rates are now between 2.25% and 2.50%.

“Inflation is way too high,” said Fed chief Jerome Powell, acknowledging that the latest inflation barometer at 9.1% “was even worse than expected” by Fed members. This is the fourth consecutive hike: a quarter point in March, half a point in May, and three quarter points in June – its biggest rise since 1994.

And ‘the monetary committee anticipates that further increases in key rates will be appropriate’, commented the Fed in a press release. Mr Powell indicated that a further ‘unusually large’ hike may be needed at the next currency meeting in September.

The decision was taken unanimously by the twelve voting members. The Monetary Committee was complete, with no vacant seats, for the first time since 2013.

Relieve pressure on prices

The Fed, which usually operates by increases of a quarter of a point, proceeded to a new sharp increase, in an attempt to curb inflation which in June reached a new high for more than 40 years. The objective of these rate hikes is to make credit more expensive in order to slow down consumption and investment and, ultimately, to ease the pressure on prices.

‘Recent spending and production indicators have slowed’, concedes the Fed, referring in particular to consumption, the locomotive of the American economy. ‘However, job creations have remained robust in recent months, and the unemployment rate is still low’, also comments the FOMC, which again ensures that it is ‘very attentive to the risks of inflation’.

The Fed hopes to achieve a ‘soft landing’ but the long-awaited economic slowdown to drive prices down could prove too severe, which could weigh on the job market and even push the world’s largest economy into a recession .

‘No recession’

“We are not trying to cause a recession,” defended the boss of the Fed, assuring that the United States was not currently in recession. “We believe there is a way to lower inflation while supporting a strong job market,” he said, pressed by reporters to determine whether GDP in the world’s largest economy was falling. not on the verge of a contraction.

“Again I don’t think the US economy is in recession now,” added the official, however, highlighting “a slowdown in spending.”

‘We may be seeing a slight change in the labor market but this is only the beginning,’ he warned. The very low unemployment rate remained stable in June at 3.6% and job creations, which were still strong, slowed down. ‘Our goal (…) is to reduce inflation and achieve what is called a ‘soft landing’ which means without a significant increase in unemployment,’ Mr Powell said.

‘Prime’

The IMF, however, is less optimistic. “The current environment suggests that the possibility of the United States escaping recession is slim,” its chief economist, Pierre-Olivier Gourinchas, warned on Tuesday. The institution has significantly lowered its growth forecast for the United States in 2022 and now only expects 2.3%.

The evolution of the gross domestic product (GDP) in the second quarter will be published on Thursday. It could be very slightly positive, after a negative first quarter (-1.6%). But the risk of recession continues to weigh on the world’s largest economy.

Asked about the Fed’s initial slowness to react to rising prices, Mr Powell defended himself: ‘The situation has developed in a very unexpected way for all of us (…). I’m not sure it would have weighed if we had raised rates earlier. “Many central banks raised rates three months before and it had no effect,” he said.

On Wall Street, the indices welcomed the determination of the Fed and the assurance by Jerome Powell that the economy was not in recession. The Dow Jones climbed 1.64%, the Nasdaq 4.28% and the S&P 500 2.67% half an hour before the close. The dollar fell against major currencies.

/ATS

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