Biggest rate hike since 1994 | The Fed does not hide its pessimism

(Washington) The US Federal Reserve raised interest rates by three-quarters of a percentage point on Wednesday, its biggest rise since 1994, as the central bank ramps up efforts to tackle the fastest-growing inflation in four decades.

Updated yesterday at 6:20 PM.

Jenna Smyalek
New York times

What you need to know

  • North American stock indices rose immediately after the Federal Reserve’s announcement.
  • Economists from RBC and CIBC estimate that the Bank of Canada is likely to emulate the Federal Reserve by raising its key interest rate by 75 basis points next month.
  • Desjardins believes that the Fed is “certainly ready to strike hard at controlling inflation”. Further sharp increases in key interest rates are expected.
  • “Let’s be clear, we’re not trying to create a recession,” Fed Chair Jerome Powell said reassuringly.

Journalism

The sharp rise in interest rates, which markets had been expecting, confirmed that Federal Reserve officials are determined to rein in rate hikes, even if it comes at the expense of the economy.

In a sign of the expected impact of the Fed’s policies on the economy, officials expected the unemployment rate to reach 3.7% this year and 4.1% in 2024, and growth would slow significantly as politicians sharply increase borrowing costs and stifle. economic demand.

The Fed’s key rate is now set in a range of 1.5% to 1.75% and policy makers have hinted that more rate hikes are coming. In a new round of economic forecasts, the Fed expects interest rates to reach 3.4% by the end of 2022. This will be the highest level since 2008, and officials have estimated that the key rate will reach 3.8% by the end of 2023. These numbers are much higher From previous estimates, the rate would peak at 2.8% next year.

Fed officials also recently indicated that they plan to cut interest rates in 2024, which may be a sign that they believe the economy will weaken so much that they need to reorient their policy approach. The main takeaway from the Federal Reserve’s economic forecasts, which it released for the first time since March, is that officials are becoming more pessimistic about their chances of letting the economy slip smoothly.

To underscore this, policy makers deleted a sentence from their post-meeting statement that expected inflation could be weak as the labor market remains strong – a signal they believe may need to curb job growth to control inflation.

In its statement after the meeting, the Fed emphasized that “inflation remains elevated, reflecting the pandemic-related supply and demand imbalance, higher energy prices and broader price pressures.”

One official, Kansas City Regional Federal Reserve Bank President Esther George, voted against a rate hike. Although M.I George had always been concerned about high inflation and had always been in favor of raising interest rates, and she would have preferred a half-point increase in this case.

change direction

Until the end of last week, markets and economists in general had expected a rise of half a point. The Fed raised interest rates by a quarter point in March and half a point in May, and indicated that it plans to continue raising them at that rate in June and July.

But central bankers have received a string of bad news about inflation in recent days. The CPI rose 8.6% in May from a year earlier, the fastest pace since late 1981.

Although the Fed’s preferred measure of inflation – the personal consumption expenditures measure – is slightly lower, it is still too high to be comfortable. And consumers are beginning to expect faster inflation in the coming months or even years, based on survey data, a worrying trend.

Economists believe expectations can be “self-fulfilling,” causing people to demand wage increases and accept higher prices in a way that perpetuates high inflation.

It is increasingly unlikely that the Fed will be able to cool inflation quickly and smoothly to its 2% annual rate target on average and in the long term.

The central bank worked to put the economy on a more sustainable path without precipitating it into a crushing recession that would cost jobs and dampen growth. Policy makers had hoped to raise borrowing costs to curb demand enough to balance supply and demand without causing much suffering. But as prices continue to rise, it becomes increasingly difficult to achieve this “soft landing”.

Interest rate hikes by the central bank are already starting to spread to the broader economy, driving up mortgage rates and helping the housing market start to cool off. Demand for other consumer goods is showing signs of slowing, as money becomes more expensive to borrow and companies may scale back expansion plans.

The goal is to reduce demand enough to allow supply – still constrained by factory shutdowns, shipping problems and labor shortages around the world – to catch up.

But it’s hard to rein in demand without hurting growth, not least because consumption makes up the bulk of the US economy. If the Fed has to drastically restrict spending in order to rein in price hikes, it could lead to job losses and business closures.

Markets are increasingly concerned that central bank policy is causing a recession. Stock prices are down and bond market signals are flashing red as Wall Street traders and economists increasingly expect the economy to slip into recession, possibly as early as next year.

This article was originally published in New York times.



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