The US Federal Reserve (Fed) building in Washington. Photo taken on April 13, 2022 (AFP / Stefani Reynolds)
The US Federal Reserve’s Monetary Policy Committee began its two-day meeting on Tuesday, after which it will announce, unexpectedly, a rate hike by half a percentage point, the first since May 2000, in a bid to check inflation record.
The meeting “started at 10 a.m. (2 p.m. GMT) as scheduled,” a representative of the Federal Reserve (Fed) told AFP.
Inflation has been rising month by month for a year now in the United States. Exacerbated by the war in Ukraine, it reached an unprecedented level in March 1981: + 8.5% in one year, according to the CPI.
In March, the Fed began raising interest rates for the first time since 2018. But then it started moving cautiously, raising 0.25 percentage points to bring interest rates in the range between 0.25 and 0.50%.
It had also signaled its desire to make six more increases this year, or as many meetings as possible by the end of 2022.
With price pressures unabated, Fed Chairman Jerome Powell has since acknowledged that it is “absolutely necessary” to restore price stability and raise interest rates “quickly”.
The US Federal Reserve has two main missions: to ensure price stability and full employment.
On the employment front, the unemployment rate fell to 3.6% in March, close to its pre-Covid-19 pandemic level (3.5%). The data for the month of April will be announced on Friday.
Companies have been facing labor shortages and mass layoffs for months. In March, another 4.5 million people quit their jobs, while the number of job offers jumped to a record 11.5 million, according to the statistics service.
As a result, companies are raising wages to attract candidates and retain employees, which in turn is fueling inflation.
The prospect of raising interest rates by the Fed caused a stir in the markets on Monday. Yields on 10-year US bonds briefly reached the 3% mark at noon for the first time since the end of 2018.
– Risk of recession –
In addition to interest rates, the central bank should mark the beginning of the reduction of its balance sheet, another important step towards normalization.
Investors are looking forward to Jerome Powell’s press conference on Wednesday, on the lookout for comments on how interest rates could rise after that meeting.
So far, the Fed has clearly telegraphed its plans, announcing in advance its readiness for aggressive tightening since the May meeting, which has helped reduce market volatility.
A majority of economists are now invoicing another, even more aggressive, three-quarter increase in percentage points at the June meeting, the first since 1994.
The Fed is also likely to start reducing its $ 9 trillion portfolio from June, at a much faster rate than in a previous cut five years ago.
The challenge is to curb inflation without leading the world’s largest economy into recession.
Concerns about it have grown in recent weeks as growth slows. The gross domestic product of the United States shrank even by 1.4% in the first quarter, on an annual basis.
Experts want to be reassuring, noting that consumption, the historical driving force of American growth, is enduring.
But in a context of war in Ukraine, economic slowdown in China and Europe, the recession no longer seems a distant danger.
Fed leaders currently estimate that they will be able to bring inflation back to their 2% target without raising interest rates above 3% to avoid delaying demand. According to them, this is a “neutral” spectrum that will neither stimulate nor slow down economic growth.