Fed accelerates rate hike, predicts economic slowdown


by Howard Schneider and Ann Saphir

WASHINGTON, June 15 (Reuters) – The U.S. Federal Reserve (Fed) on Wednesday raised its main interest rate by three-quarters of a point in a bid to regain control of inflation and said it expects a slowdown in inflation. economy and a rise in unemployment in the coming months.

This rate hike, the largest decided by the central bank of the United States since 1994, comes after the publication in recent days of several indicators suggesting that the fight against inflation, which has become the priority of the Fed and the White House , has so far made only meager progress.

The rise in consumer prices notably reached 8.6% over one year in May, its highest level since 1981, and a closely followed index of household morale fell to its historic low.

“Inflation remains elevated, reflecting supply-demand imbalances related to the pandemic, rising energy prices and broader price pressures,” the Fed said in the statement released at after two days of debate.

“The Committee is strongly committed to bringing inflation back to its 2% target.”

The statement reiterates that the war in Ukraine and containment policies in China are causing additional inflationary pressures.

Members of the Federal Open Market Committee (FOMC), the Fed’s monetary policy committee, “have come to the conclusion” that they must accelerate the return of interest rates to a more neutral level, explained the chairman of the Fed, Jerome Powell, at a press conference.

GROWTH WILL SLOW, UNEMPLOYMENT WILL RISE

“Seventy-five basis points felt like the right thing to do in this meeting, and we did,” he said.

Jerome Powell added that the FOMC would “most likely” have to choose between a half-point or three-quarters point hike at its next meeting in late July, while emphasizing that he only expected increases of 75 basis points are becoming “usual”.

The hike decided on Wednesday takes the federal funds rate target to 1.50%-1.75% and the median forecast of FOMC members now gives a rate of 3.4% at the end of the month. year and 3.8% in 2023, while their March forecast put it at just 1.9% in December this year.

The Fed has also lowered its economic forecasts, saying it now expects growth to slow to 1.7% this year and an unemployment rate of 3.7% at the end of the year and then 4.1%. by 2024, a level higher than that which the central bank considers to correspond to full employment.

THE FED DOES NOT EXPECT A RECESSION

While no member of the FOMC foresees a recession, their forecasts point to weak growth in 2023 and to lower interest rates as early as 2024.

At the same time, the PCE inflation rate is expected to reach 5.2% this year and then gradually return to 2.2% in 2024.

“The Fed is willing to let the unemployment rate rise and risk a recession as collateral damage to bring down inflation,” said Brian Jacobsen, senior strategist at Allspring Global Investments.

Jerome Powell, however, clarified that the central bank did not aim to trigger a recession.

In financial markets, the Standard & Poor’s 500 index briefly pared gains just after the release of the monetary policy statement, but rebounded after Jerome Powell’s statements and gained 1.94% less than half an hour from closing time.

At the same time, the yield on ten-year Treasury bills fell nearly 14 basis points to 3.3448% and the dollar lost 0.76% against other major currencies.

At the same time, interest rate futures markets reflected an estimated 85% probability of another three-quarter point rate hike next month, but favored the hypothesis of a rise limited to half a point in September.

Kansas City Regional Fed Chair Esther George is the only FOMC member to vote against the 75 basis point rate hike on Wednesday, after arguing for a 50 basis point hike. (Report Howard Schneider and Ann Saphir, French version Marc Angrand, edited by Jean-Stéphane Brosse and Jean Terzian)




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