The Fed raises its rates and beefs up its discourse on inflation

This is a first step towards normalization. As expected, the Fed raised interest rates by a quarter of a point on Wednesday, in a move aimed at trying to curb runaway inflation in the United States. They are now between 0.25% and 0.50%.

“Russia’s invasion of Ukraine is causing enormous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the short term, the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity. from the Fed.

The US Federal Reserve has therefore toughened up its rhetoric on inflation, controlling which is becoming the priority. Fed governors are now planning, on average, seven rate hikes by the end of the year, including the one decided at this meeting, as well as three or four more next year. At the end of 2022, Fed rates could reach 1.875%. When its forecast was last released in December, the Federal Reserve forecast three quarter-point hikes in 2022, followed by three more hikes in 2023.

Price pressures

Some campaigned, in the monetary policy committee, for a more frank increase of half a point, from this meeting in March. But in the end, only St. Louis Fed President James Bullard voted in favor of a half-point hike.

Fed Chairman Jerome Powell wanted to remain measured and give himself more flexibility, particularly given the international context. “If inflation shows that it is necessary to raise rates more quickly, we will do so,” he said, however, during his press conference on Wednesday.

The invasion of Ukraine by Russia, then the sanctions decided by the Europeans and the Americans against Moscow, caused a new shock on the supply chains. The prices of energy and many other products, agricultural in particular, have continued to climb in recent days. And it shouldn’t stop anytime soon. In February, inflation reached a new high for 40 years, at 7.9% over one year.

The Fed has also adjusted its forecasts. Its economists now put inflation at 4.3% for the whole of 2022, against 2.6% previously. “Inflation should remain high until the middle of the year, before receding in the second half of the year,” said Jerome Powell. Without the invasion of Ukraine by Russia, the peak would undoubtedly have been during this first quarter.

As for growth, it could be weaker than expected, at 2.8% over the year, while the Federal Reserve was betting on 4% in December. “The probability of a recession in the next two years is low, the labor market remains solid,” added Jerome Powell, for whom “the economy can withstand a tightening of monetary policy.”

The reduction of the balance sheet will start

“If it hadn’t been for these geopolitical events, a half-point hike would certainly have been on the table at this meeting,” noted Nathan Sheets, Citi’s chief economist before the meeting. you.

This first rate hike since 2018 should in any case encourage banks to offer higher interest rates to their customers, for the purchase of real estate or a car, in overheated markets, and so slow down consumption and ease the pressure on prices. The Fed’s bet is that a gradual increase will gradually accustom the markets and not weigh too much on growth.

The Fed also provided details on the reduction of its balance sheet. The securities purchase program on the markets, which was to support the economy during the pandemic, ended last week, when the pace had already slowed considerably since the end of last year. Experts now expect the US central bank to sell securities on the market from May or June, at its next meetings, to reduce a portfolio that has reached 9,000 billion dollars.

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