To fight once morest inflation and avoid seeing the United States fall into recession, the American Federal Reserve (Fed) on Wednesday raised its main interest rate by half a point, its biggest hike in almost 22 years, and announced that it would start reducing its balance sheet next month, accelerating the tightening of its monetary policy in the face of to inflation. The federal funds rate target (“fed funds”), the main monetary policy instrument of the Fed, is increased between 0.75% and 1%. This decision was taken unanimously. The Fed said further hikes “would be warranted” in the future. However, a more severe tightening is excluded for the time being, which allowed the New York Stock Exchange to end up sharply. According to final results at the close, the Dow Jones index climbed 2.81% to 34,060.99 points. The technology-dominated Nasdaq jumped 3.19% to 12,964.86 points while the S&P 500 rose 2.99% to 4,300.20 points.
In addition, the Federal Reserve, which has accumulated 9 trillion in Treasury bills and other securities to its assets by pouring liquidity into the financial system to support the economy during the pandemic, will begin to reduce its balance sheet from the 1st June, another monetary tightening tool to temper inflationary pressure. From this date, its balance sheet will begin to be reduced at the rate of 47.5 billion dollars per month and up to 90 billion following three months, another way to increase the cost of credit to temper demand and increases. of price.
Finally, the Fed warns that the war in Ukraine and the lockdowns in China will worsen inflation and logistics problems. Indeed, the bogged down Russian-Ukrainian war is weighing on European growth, pushing up global energy prices and jeopardizing food security in the world. Meanwhile, China’s zero-tolerance policy once morest Covid-19 has compounded problems on global supply chains. All of these factors are slowing US growth. The country’s Gross Domestic Product (GDP) even contracted by 1.4% in the first quarter.
Nonetheless, Fed members continue to believe that inflation will gradually return to the Fed’s 2% target as it raises credit costs, but she insists that it will “pay particular attention to inflation”.
Inflation
As a reminder, in March the Fed had started to raise its rates, for the first time since 2018. But it had acted cautiously by raising them to a range between 0.25 and 0.50%, an increase of 0 .25 percentage points. However, it had signaled its desire to make six more increases this year, or as many as meetings by the end of 2022. Since then, inflation has continued to climb. Worsened by the war in Ukraine, in March it reached a peak not seen since December 1981: +8.5% over one year, according to the CPI index.
The American Central Bank has two main missions: to ensure price stability and full employment.
In addition to the surge in prices, Jerome Powell deplores a job market at an “unhealthy” level. Indeed, the unemployment rate is close to its pre-pandemic level (3.6% in March compared to 3.5% in February 2020).
And companies have been facing labor shortages and mass quits for months. In March, another 4.5 million people left their jobs, while the number of job offers soared to 11.5 million, a record, according to the statistics office. To attract candidates and retain employees, companies increase wages, which has the effect of fueling inflation.