Federal Reserve Raises Interest Rates for Tenth Time in a Row Despite Signs of Economic Slowdown and Banking Crisis

The decision was taken unanimously. The American Central Bank raised, on Wednesday May 2, its main key rate for the tenth time in a row since March 2022, by a quarter of a percentage point, determined to curb inflation despite signs of running out of steam. economy and despite the recent banking crisis.

The Fed’s main policy rate is now in a range of 5% to 5.25%, the highest since 2006, the institution said in a statement issued after the meeting of its monetary policy committee. (FOMC).

Many market players are now waiting for a break in these rate hikes, which increase the cost of credit for households and businesses, and, by slowing down economic activity, should make it possible to ease the pressure on prices.

But Federal Reserve Chairman Jerome Powell has ruled out an interest rate cut this year despite the possibility of a “light” recession, because inflation “will not go down quickly”. He acknowledged that monetary policy was « restrictive » but that a recession “could be avoided”. “Under these conditions, if the forecasts turn out to be correct, it would not be appropriate to lower the rates. We will not lower the rates”a dit M. Powell.

The banking crisis provided unexpected support to the Fed’s fight against inflation: “The tightening of credit conditions for households and businesses is likely to weigh on economic activity, hiring, and inflation”underlines the Fed in its press release, hammering that “the American banking system is sound and resilient”.

Signs of shortness of breath

And, while it was still resisting, the American economy is multiplying the signs of slowing down, long awaited and finally visible. Last week, first-quarter growth came in at 0.3% from the last three months of 2022 and just 1.1% annualized. And the probability of a recession, more marked than initially expected, is widely anticipated by the markets.

The fragility of certain banking establishments came back to the fore with the fall of the regional bank First Republic, finally bought over the weekend by JPMorgan Chase, the number one in the sector. The concern about the solidity of these medium-sized banks remains strong, several of them saw their title fall on Wall Street on Tuesday.

“The Fed must consider” these banking difficulties “like a game-changing event”said Karl Haeling of LBBW, and no longer consider that the banks bear the costs of cases “isolated from mismanagement”. Because these banks are suffering in particular from the rise in rates, which set the day-to-day cost of the money that institutions lend to each other. It has gone in just over a year from a range between 0% and 0.25% to values ​​between 4.75% and 5% now. However, while inflation fell sharply in March, core inflation (excluding food and energy prices) barely slowed and is now higher than inflation itself.

Jerome Powell has been saying it for months that bringing US inflation back to its 2% target will be a long and difficult but necessary effort, because long-term inflation would have even more harmful consequences for the economy according to him. . Between May and December, the Fed had, in the face of persistent inflation, raised its rates at a pace not seen since the beginning of the 1980s, opting for two unusual hikes of half a point, and even, on four occasions, of three quarter points.