Jerome Powell before a Senate committee in Washington on March 7, 2023 (AFP/Mandel NGAN)
The US central bank is ready to go on the offensive against inflation that refuses to come down, its president Jerome Powell having warned on Tuesday that it could again accelerate the pace of rate hikes and push them higher than expected.
“The most recent economic data is stronger than expected, suggesting that the final level of key rates is likely to be higher than expected,” the Fed Chairman told a Senate committee.
In other words, the economy remains overheated and the main key rate of the Fed could exceed 5.1%, the maximum rate that was anticipated by the institution in December.
The Fed’s key rate (AFP/Patricio ARANA)
To fight against high inflation, the Fed has been raising its rates for a year. These, which were in the range of 0 to 0.25% during the pandemic to support the economy through consumption, are now between 4.50 and 4.75%.
This increases the cost of credit for households, which are therefore less inclined to consume, especially since their purchasing power is also affected by inflation. The objective is, ultimately, to ease the pressure on prices.
“We are seeing the effects of our actions on demand in the economic sectors most sensitive to interest rates”, particularly real estate, said Jerome Powell.
– “Ready to step up the pace” –
“However, it will take time for the full effects of the currency restrictions to be felt,” he added.
Regarding goods, inflation has been slowing “for some time now. It’s still too high, but it’s coming down.”
On the other hand, the situation is different on the services side. While house prices are rising more slowly now, “everything else, meaning financial services, health, travel and leisure, all of that is the source of the inflation we have now,” he said. explained the chairman of the Fed.
At the next Fed meeting, the rise in rates could therefore start again: “if all the data were to indicate that a faster tightening was justified, we would be ready to accelerate the pace of rate hikes”.
A supermarket in Washington on January 19, 2023 (AFP/Stefani Reynolds)
After several strong hikes, by half a point and three quarters of a percentage point, the Fed had slowed the pace on February 1, returning to its more usual increase of a quarter of a point.
But the tide could be reversed. Market participants are overwhelmingly expecting another half-point (or 50 basis points) hike on March 22, according to CME Group’s valuation.
These statements panicked Wall Street, which suddenly plunged into the red on Tuesday morning after these statements.
Plus, rates could stay high “for a while,” “Jay” Powell warned.
– “Far” from a recession –
“January’s data on employment, consumer spending, manufacturing output and inflation partly reversed the easing trends we saw in data just a month ago,” he said. he lamented.
Because despite the efforts of the Fed, inflation started to rise again in January, to 5.4% over one year, according to the PCE index, favored by the Fed, and which it wants to bring back around 2%.
Another measure, the CPI index, on which pensions are indexed, slowed slightly over one year, to 6.4%, accelerating however over one month for the first time since September.
As for the unemployment rate, in January it was at its lowest for more than 50 years, at 3.4%.
Inflation in the United States (AFP/Eléonore HUGHES)
Jerome Powell, however, was reassuring about the much-heralded recession, deeming “possible to bring inflation down to 2%, with less significant effects on the labor market” than what had been observed in previous periods of slowdown economic.
“It looks like we’re a long way from anything resembling a recession,” he said.
The head of the Fed also urged the elected representatives of Congress to raise the debt ceiling, in order to avoid the country defaulting on payment, the consequences of which are “difficult to estimate”, but “could be extremely negative and cause long-term damage”.
© 2023 AFP
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