The US central bank raised its rates on Wednesday to their highest level in nearly 15 years, and plans to continue raising them, seeking at all costs to curb high inflation, a task complicated however by the threat of a recession.
The Fed has, as expected, raised its key rate by 0.75 percentage points, now between 3.75 and 4.00%. This is its highest level since January 2008.
And officials of the institution, moreover, say they anticipate “that further rate hikes will be appropriate”, according to a press release published after two days of meetings.
They indicate, however, that the effects on the economy of the increases already made since March will have to be taken into account to establish the rhythm of the increases which will be decided upon at the next meetings. This could signal slower increases in the coming months.
It takes months for these Fed decisions to have an effect on the economy.
Inflation, thus, was still in September of 6.2% over one year, close to its highest levels for more than 40 years, according to the PCE index favored by the Fed, whose objective is to bring it back to 2%.
Another measure, the CPI index, which is a reference in particular for the indexation of pensions, showed a price increase of 8.2% over one year in September.
Wednesday's policy rate hike is the sixth in a row since March, when it was between 0.00 and 0.25 percent, at its lowest to boost economic consumption during the COVID-19 crisis. 19. The Fed had started with the usual increase of 0.25 points, before accelerating to 0.50, and finally, four times now, by 0.75 points.
Less than a week away midterm elections, in which President Joe Biden risks losing his slim Democratic majority in Congress, inflation is now the main concern of American households.
But another danger threatens, since this voluntary slowdown in activity risks plunging the American economy into recession in 2023.
“First signs” of a slowdown
Jerome Powell had warned, at the end of the last meeting, in September, that there was no “painless way” to fight inflation durably.
In the meantime , the United States recorded a quarter of growth between July and September, with +2.6% GDP growth at an annualized rate.
As for the employment market, it still displays iron health. The official figures for October will be released on Friday, but we already know that private employers created 239,000 jobs in October, much more than in September, and much more than expected, according to figures released Wednesday.
“While we are seeing the first signs of a Fed-induced slowdown in (labour) demand, this is only affecting certain sectors of the labor market,” commented Nela Richardson, chief economist at ADP, quoted in the press release.
The Democrats, who had focused their campaign on the right to abortion, when the Republicans played the card of the fight against inflation, are now trying to put forward their economic program in favor of the middle classes.
Democratic Senator Sherrod Brown, Chairman of the Senate Banking Committee, thus sent a letter to Jerome Powell at the end of October, emphasizing that “the fight of the Fed against inflation should not make workers suffer”.
The credibility of the powerful institution is at stake because, after having ensured for months that high inflation would only be temporary, it has until failed to slow it down.
However, the more households anticipate a lasting rise in prices, the more they act accordingly, the more it becomes entrenched. This then requires even more painful measures, as in the early 1980s, after years of inflation sometimes approaching 15%.
Katrine Johns has been a reporter on the news desk since 2013. Before that she wrote about young adolescence and family dynamics for Styles and was the legal affairs correspondent for the Metro desk. Before joining The Gal Post, Katrine Johns worked as a staff writer at the Village Voice and a freelancer for Newsday, The Wall Street Journal, GQ and Mirabella. To get in touch, contact me through my firstname.lastname@example.org 1-800-268-7128