The American central bank, the Federal Reserve (Fed), raised its rates by 0.75 points, for the fourth consecutive time, on Wednesday November 2, and it will continue: “It is premature to speak of a break, said its president, Jerome Powell. We think we have some way to go…with interest rates. » Its policy rates, which were just above zero in March 2022, are now above 3.75%. The stock market did not appreciate at all: the S&P 500 index ended the session down sharply by 2.50% while the technology-rich Nasdaq fell 3.36%.
The reversal was complete after the release of the Fed’s press release at 2 p.m., which was well received by the markets. The central bank adopted a less aggressive tone than in the past. ” The committee [de politique monétaire] will take into account the cumulative tightening of monetary policy, the lag with which monetary policy affects economic activity and inflation, as well as economic and financial developments”, explained the Fed. Translation: the bank knows that rate hikes take time to take effect and it will not be deaf to changing economic conditions as corporate executives cry recession and the left wing Democrats s worried about rising unemployment. The markets then went into the green, believing that the Fed was announcing its famous “pivot”, a return to a more accommodating policy over the next few quarters.
Cold shower
It was counting without the press conference of its president, Jerome Powell, which had the effect of a cold shower. The question is now less the brutality of the increase (four increases of 0.75 points, which has not been seen for four decades), than its final level and the duration during which these high rates will have to be maintained. The next increase, in December, could be only half a point. But Mr. Powell mostly indicated that he thought the final level of interest rates would be higher than the Fed thought at its last meeting in September.
Next, Mr. Powell does not feel that his institution, which still assured last year that inflation was ” provisional “, acted too abruptly: “I don’t feel like we’ve tightened too much or moved too fast”, did he declare. And he persists in believing that it is less dangerous to do too much than not enough. For him, letting the inflation expectations of businesses and individuals take root in the economy means taking the risk of a catastrophic inflationary spiral. On the other hand, if the rise in rates is too high and causes a recession, there will always be time to loosen the monetary constraint to revive the economy.
You have 52.4% of this article left to read. The following is for subscribers only.