The Fed is aggressively raising interest rates for the first time in 22 years

The Fed is aggressively raising interest rates for the first time in 22 years

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To combat inflation and prevent the United States from falling into recession, the US Federal Reserve (I fed) on Wednesday raised its key interest rate by half a point, the biggest increase in almost 22 years, and announced it would begin lowering its balance sheet next month, accelerating tightening its monetary policy in the face of inflation. The federal capital interest rate target (“I fed funds “), its main monetary policy instrument I fed, increases between 0.75% and 1%. This decision was taken unanimously. The Fed said further increases “would be justified” in the future. However, for the time being, a tighter tightening is ruled out, which allowed the New York Stock Exchange to end abruptly. According to the final results at the close, the Dow Jones index strengthened 2.81% to 34,060.99 points. The technology leader 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 amassed $ 9 trillion in bonds and other securities by pouring liquidity into the financial system to support the economy during the pandemic, will start cutting its balance sheet from June 1. another monetary tightening tool to relieve inflation pressure. From that date, its balance sheet will begin to shrink at $ 47.5 billion a month and up to $ 90 billion in three months, another way to increase credit costs to mitigate demand and price increases. .

Finally, the Fed warns that the war in Ukraine and the lockdown in China will exacerbate inflation and logistics problems. Indeed, the murky Russia-Ukraine war is burdening European development, raising world energy prices and endangering world food security. Meanwhile, China’s zero-tolerance policy against Covid-19 has exacerbated problems in global supply chains. All of these factors are slowing down US growth. The country’s Gross Domestic Product (GDP) shrank even by 1.4% in the first quarter.

However, Fed members continue to believe that inflation will gradually return to the Fed’s 2% target as credit costs rise, but insists it will “pay close attention to inflation.”

Inflation

Recall that in March the Fed had begun to raise interest rates, for the first time since 2018. But it acted cautiously raising them in a range between 0.25 and 0.50%, recording an increase of 0.25 percentage points. However, it had signaled its desire to make another six increases this year, or as many meetings by the end of 2022. Since then, inflation has continued to rise. Exacerbated by the war in Ukraine, it reached an unprecedented level in March 1981: + 8.5% in one year, according to the CPI.

The US Federal Reserve has two main missions: to ensure price stability and full employment.

In addition to rising prices, Jerome Powell disapproves of an “unhealthy” job market. Indeed, the unemployment rate is close to the pre-epidemic level (3.6% in March compared to 3.5% in February 2020).

And 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. In order to attract candidates and retain employees, companies are raising salaries, which in turn is fueling inflation.