New rate hike in the United States. The US Federal Reserve (Fed) has announced a further increase rates of around 75 basis points, the fifth of the year. While US rates have so far been within a range of 2.25 to 2.50%, the majority of experts expected an increase of 75 basis points, although some mentioned a scenario of 100 basis points.
Since Fed Chairman Jerome Powell’s speech in Jackson Hole (Wyoming) at the end of August, investors have been anticipating a faster and longer monetary tightening than initially expected. This Wednesday, the Fed admits that it “anticipates that additional increases will be necessary” and said to expect « almost zero growth for 2022 (+0.2%) once morest 1.7% forecast in June”. Operators now favor the hypothesis of a Fed rate of at least 4.50% at the end of the year, an altitude that the institution has not known for almost 15 years.
Financial market jitters
By raising rates, the Fed wants to curb inflation which, although it slowed in August thanks to lower gasoline prices, remained at 8.3% year on year, a level higher than expected . The Fed wants to avoid repeating the scenario of the 1980s when prices jumped 15%
And this despite the risk of recession posed by the consequences of a rate hike, not only in the United States but also on the global economy. However, the good performance of the American labor market, with an unemployment rate at its lowest level for 50 years (3.7%) gives the Fed room to succeed in the “soft landing” of the economic situation.
Corporate and government interest rates at their highest
The aggressive monetary policy of the US central bank is already being felt. On Monday, even before this new rate hike, US bond yields rose to their highest level in eleven years. US 10-year Treasuries rose 3.51%, a first since April 2011.
This hot spell in the bond market is already weighing on corporate financing conditions. The average rate for a 10-year loan for the best-rated American companies has jumped by almost one point since the beginning of August. For the lowest-rated companies, the average cost of credit is now close to 9%, compared to around 4% just a year ago. The real estate market is also on the front line, with the average rate for 30-year mortgage loans rising above 6% last week for the first time since 2008.
Debate on the need to raise rates
However, the monetary policy conducted by most central banks in the world to fight once morest inflation does not meet with consensus. “It reminds me of what was happening with the bloodletting”said Nobel laureate in economics Joseph Stiglitz during an interview with AFP, referring to the practice of making a patient bleed to cure him since ancient times. “When a patient was bled, generally he did not heal, except by a miracle. So they bled him even more, and his health worsened all the more. I’m afraid central bankers are doing the same right now.”criticized the economist.
“Did the economy really need this to slow down? », wonders for his part Eric Dor, director of economic studies at the IESEG business school. According to him, “Inflation has itself created the drop in activity, households are losing purchasing power, the increase in wages is lower than inflation, and represents a brake on consumption”particularly for Europe where rate hikes might further weaken the economy.
“Will that cause a little loss of growth?” It’s possible “, acknowledged last week the boss of the European Central Bank Christine Lagarde during a conference in Paris. But for her, “it’s a risk that we must take by having measured it well”.
According to Joseph Stiglitz, the inflationary surge is less caused by excess demand than by energy and food price hikes and persistent blockages in supply chains. Phenomena once morest which central bankers have a much smaller field of action. They “use a remedy resulting from a misdiagnosis”insists the economist, warning that we might see in the United States the price of rents continue to soar under the effect of the rise in rates, and therefore inflation persist. “The risk is that without having any real impact on inflation, this policy worsens the cost in terms of activity and employment”craint Eric Dor.