Facing inflation that continues to rise in the United States, which has become an economic priority for President Joe Biden, the US central bank is preparing to raise key interest rates for the third time, Wednesday.
The Monetary Policy Committee, the Federal Reserve’s decision-making body, meets on Tuesday and Wednesday. And it seems that a half percentage point, or 50 basis point, rate hike is certain, according to what “AFP” quoted.
But it is the assumption of an even larger increase, of three-quarters of a percentage point, or 75 basis points, that is stirring the markets now. This increase will be the first since 1994.
“Markets are beginning to take into account the risks of 75 basis points at the Fed meeting next week,” Sean Osborne of Scotiabank told the agency.
This is due to inflation. It started a timid slowdown in April, which gave hope that the worst was over.
But the May numbers, which were issued on Friday, were a wake-up call for a return to reality, with a rapid re-rise, setting a record in 40 years, with 8.4 percent on an annual basis, and 1 percent on a monthly basis, according to the Consumer Price Index Index.
The Fed prefers the personal consumption expenditures index, released later in the month, which also slowed in April to 6.3 percent on an annual basis, but still well above the 2% target, which is good for the economy.
However, Osborne seems skeptical of the hypothesis of a sharp rise that is expected to provoke turmoil in the markets. But he cautioned, “It’s a risk, of course.”
On Friday, a quarter of market workers expected a sharp rise of 75 basis points, while three quarters estimated a 50 basis point increase, similar to the last meeting in early May, according to an assessment of CMA Group futures products. But on Saturday, only 3.6 percent thought the Fed would raise interest rates by 75 basis points.
Krishna Guha, an economist at Evercore, which specializes in banking and investment services, said, “Some think that the Fed may propose a sudden increase of 75 points at the June meeting. Nothing is impossible under these circumstances, but we think that is unlikely. “.
He explained, “If the Federal Reserve offers the possibility of increasing 75 basis points, (..) that will be mostly in September.”
By raising key interest rates, the Fed encourages banks to make more expensive loans to their customers who will, therefore, be less inclined to consume.
“The Fed has to cut demand to respond to a world where supply is limited,” Diane Sonk, chief economist at Grant Thornton, said in a tweet.
The Federal Reserve cut the interest rate to zero in March 2020 to support the economy while Covid has caused widespread disruptions in business.
Interest rates ranged between zero and 0.25% for two years, before being raised by a quarter point in March 2022, then by half a point in May, and now range between 0.75 and 1 percent.
The Fed must now engage in a delicate balancing act to slow inflation, without weighing down economic growth too much.
“The more consumers spend, the more the Fed will need to tighten policy, and this increases deflation risks,” warned Yelena Maleyev, also an economist at Grant Thornton.
The forced slowdown in consumption is likely to weigh on the US economy, raising fears of deflation or “stagflation” – a prolonged period of weak growth and high inflation. The unemployment rate is also likely to rise again.
In the White House, Joe Biden held a rare meeting at the end of May with US Federal Reserve Chairman Jerome Powell to discuss spiraling inflation.
In another major step to normalize monetary policy, the Federal Reserve on June 1 began reducing its balance sheet, after increasing bond purchases, during the Covid pandemic, to inject liquidity into the financial system and allow it to continue operating.
The Federal Reserve will also, on Tuesday and Wednesday, update its forecasts for inflation, growth and unemployment.
This meeting will also be the first since Jerome Powell officially began his second term on May 23, and appointed Lyle Brainard as the bank’s vice president. It will also mark the arrival of two new governors, Lisa Cook and Philip Jefferson, at the bank.