The Federal Reserve is “firmly committed to bringing inflation down to 2% and will remain so until the job is done,” insists President Powell.
The American central bank (Fed) gave a new strong turn to its monetary policy on Wednesday, in the face of inflation still far too high, and warned that it would have to tighten further, which will be painful for households.
The mighty US Federal Reserve raised its key interest rate by three-quarters of a percentage point to a range of 3.00-3.25%.
This is the third time in a row that the Monetary Policy Committee (FOMC), the Fed’s decision-making body, has made an increase of this magnitude. It had started in March with a usual increase of a quarter point, before rising by half a point in May.
And the movement should continue in 2022, until the key rate is raised by another percentage point.
Because the Fed is “firmly resolved to bring inflation down to 2% and will remain so until the job is done”, hammered its president, Jerome Powell, Wednesday during a press conference. He even warned of the risks that might be posed by “premature easing of monetary policy”.
Raising the key rate increases the interest rates of various loans to individuals and professionals, in order to slow down economic activity, and therefore ease the pressure on prices.
“We need to realign supply and demand. And our way to do it is to slow down the economy”, explained Jerome Powell.
Mortgage rates, for example, have risen since the beginning of the year, and have just exceeded 6% for a 30-year loan, for the first time since 2008. This is driving down sales in this sector, which had displayed insolent good health since the start of the pandemic.
No “painless” way to deal with inflation
But bringing inflation back into the nails will not be painless, warned the president of the institution.
“If we want to get back to a very strong labor market period, we have to put inflation behind us. I wish there was a painless way to do this but there isn’t,” Powell explained.
Thus, the Fed, which has also updated its forecasts for the American economy, now forecasts almost zero GDP growth in 2022 (+0.2%), when it was counting, in June, on +1.7%. She sees it then rebound to 1.2% in 2023, less strong, however, than the 1.7% growth she expected in June for next year.
Inflation forecasts, on the other hand, remain close to what was expected in June: 5.4% in 2022 (vs. 5.2%) for PCE inflation, before slowing sharply in 2023, to 2.8% ( once morest 2.6% previously).
The Fed favors this inflation index, which stood at 6.3% over one year in July, according to the most recent figure available, to the CPI index, which refers to the indexation of pensions in particular. Admittedly, this slowed down in August in the United States, thanks to the drop in gasoline prices, but, at 8.3% over one year in August, showed still very strong pressure on prices, with generalized inflation.
Rise in unemployment
This deliberate slowdown in the economy is very tricky, because too much of a brake might tip the United States into the recession that is already hovering over the entire global economy.
However, the excellent health of the job market gives the Fed leeway to act aggressively.
The current unemployment rate, at 3.7%, is one of the lowest in 50 years, and there are not enough workers to fill all the vacancies. The Fed expects it to increase, to 3.8% on average in 2022 (3.7% previously expected), then to 4.4% in 2023 ( once morest 3.9% expected in June).
Letting inflation take hold, however, would imply even more painful measures for households and businesses, as was the case 40 years ago, following years of soaring prices sometimes approaching 15%.
The US central bank, like its counterparts around the world, is trying to rein in inflation caused by supply chain disruptions linked to Covid-19, and exacerbated by rising energy and food prices with the war in Ukraine.
Many are meeting this week, including Thursday, the Bank of England (BoE) and that of Japan (BoJ). Tuesday, the bank of Sweden, the Riksbank, had created the surprise with an unprecedented increase of one point.
In early September, the European Central Bank (ECB) had raised its rates by three quarters of a percentage point, unheard of.