Faced with prices that continue to climb in the United States, the American central bank, the Fed, announced on Wednesday July 27 a new sharp increase in key rates of 0.75 points.
The Fed plans to continue raising its key rates, she said. “Recent spending and production indicators have slowed. However, job creations have remained robust in recent months, and the unemployment rate is still low”the Fed said in a statement.
The meeting of the Fed’s monetary policy committee, the FOMC, began on Tuesday. At its previous meeting in mid-June, the FOMC had already raised rates to a range of 1.50 to 1.75%. This was the biggest increase since 1994. This time, the 0.75 point increase takes key rates to between 2.25 and 2.50%.
Inflation at 9.1% year on year in June
The objective of this decision is to make credit more expensive in order to slow down consumption and, ultimately, ease the pressure on prices. Inflation indeed again reached a new record in June, at 9.1% over one year, unheard of for more than forty years in the world’s largest economy. Consumption is the engine of the US economy, accounting for nearly three-quarters of GDP.
The comments that Jerome Powell will be able to make on the rate of increases envisaged by the institution for the coming months will also be scrutinized and dissected by observers. “Mr. Powell will reiterate that the Fed sees inflation as a blight, especially for low-income households, and that policymakers are determined to bring it down”anticipates the economist Ian Shepherdson, of Pantheon Macroeconomics.
The Fed said it would take a drop in inflation for it to consider stopping raising rates, or at least slowing the pace of hikes. “We expect this condition to be met by the time of the September meeting”, adds Ian Shepherdson. The long-awaited economic slowdown to bring prices down could, however, prove too strong, and plunge the world’s largest economy into recession.
According to the IMF, “slim possibility” of escaping the recession
The European Central Bank has also started to tighten its monetary policy, following many financial authorities. And the International Monetary Fund (IMF) said on Tuesday that it was essential that these institutions continue to fight against inflation. Of course, this will not be done without difficulty and “Tighter monetary policy will inevitably have economic costs, but any delay will only exacerbate them”, according to the IMF. The Fed hopes to achieve a “soft landing”.
The good health of the American economy should allow it to escape a recession, according to Joe Biden’s Minister of Economy and Finance, Janet Yellen. The IMF is less optimistic. “The current environment suggests that the possibility of the United States escaping recession is slim”its chief economist, Pierre-Olivier Gourinchas, warned on Tuesday.
The international institution now expects only 2.3% growth in the United States for this year, ie 1.4 points less than in its latest forecasts, published in April. Second-quarter gross domestic product growth will be released on Thursday. It should be very slightly positive, after a negative first quarter (−1.6%), thus saving the US economy from recession for this time.
Should it be negative again, the world’s largest economy would then enter a technical recession. The very definition of recession, however, is the subject of debate in the country as this publication approaches: is it negative growth for two quarters, or a broader deterioration in economic indicators – which does not is not the case now?