Faced with soaring prices, the Fed doubles its key rates

On the New York Stock Exchange, June 15, 2022.

The Federal Reserve (Fed) decided on Wednesday, June 15, to double its key rates, after inflation reached 8.6% in May. The US central bank increased its short-term rates by 0.75 points, an unprecedented increase since 1994. They are now in a range between 1.5% and 1.75%. In March, interest rates were still close to zero, ranging between zero and 0.25% since the start of the Covid-19 pandemic. But the institution chaired by Jerome Powell allowed itself to be overwhelmed by the generalized surge in prices to levels not seen since 1981 and left the labor market to heat up white, with a minimal unemployment rate of 3.6%.

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The calamitous inflation figure for May, published on Friday, shocked the institution. “We thought strong action was warranted at this meeting and we did it,” said Mr. Powell, believing that “the labor market is extremely tight and inflation is far too high”. Mr Powell has considered a further rate hike, 0.5% to 0.75%, at his next meeting in July. By the end of the year, the Fed plans to double its rates again, which would reach 3.4% and then peak at 3.8% in 2023. This is a considerable upward revision since the March forecasts, with the institution at the time predicting short-term rates of only 1.9% and 2.8% at the end of 2022 and 2023.

The firmness was welcomed by the financial markets, which are increasingly critical of a central bank which they accused of always being behind schedule. Wall Street rebounded, with the tech-heavy Nasdaq rising 2.50%, while the S&P 500, which mirrors large companies, gained 1.46%. Ten-year rates were down significantly, from 3.48% to 3.28%. No one knows if this financial lull will last – in previous meetings, the markets have each time welcomed Mr. Powell’s weighted speech, before changing their minds and unscrewing in the following days – but the bank gives the feeling of reconnect with economic reality, that of serious inflation that needs to be stemmed.

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“No general slowdown”

Mr Powell still believes it will be possible to steer a soft landing for the economy. “We are not looking to cause a recession”, he assured. The central bank forecasts for 2024 an unemployment rate of 4.1%, growth of 1.9% and inflation reduced to 2.1%, which would be equivalent to a controlled slowdown in the economy. The boss of the Fed believes that an accident is possible in the event of an external event, beyond his control, such as the surge in raw materials.

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