Inflation and the economy slow down in the United States, the Fed too – 02/01/2023 at 08:54

The US central bank (Fed) is expected to announce another rate hike on Wednesday after its first meeting of the year, but by just a quarter of a percentage point, as economic activity and inflation show signs of slowing down.

The Fed is preparing to raise rates for the eighth straight time since March. These, which were then at zero, are now within a range of 4.25 to 4.50%.

But after several unusually high hikes of half a percentage point and even three-quarters of a percentage point, the Fed is likely to revert to a more usual hike: just a quarter of a point, or 25 basis points.

This is “prudent given the slowdown in wage and price inflation and weak economic activity figures”, notes Steve Englander, economist for Standard Chartered and former economist at the Fed.

Members of the Fed’s Monetary Policy Committee (FOMC) have been meeting since Tuesday morning. Their decision will be announced in a statement Wednesday at 2:00 p.m. (7:00 p.m. GMT), and the president of the institution, Jerome Powell, will hold a press conference thirty minutes later.

– “Their work is done” –

A figure, published Tuesday morning by the Department of Labor, seemed to persuade economists that inflation is now on the right track: the average cost of an employee, with a rise in the fourth quarter less strong than those of previous quarters .

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Evolution of the US Federal Reserve key rate ( AFP / )

This “will likely help convince the Fed to slow the pace further,” said Lydia Boussour, economist for EY Parthenon, in a note.

“Going forward, with labor market conditions expected to deteriorate markedly, it is only a matter of time before wage growth slows more significantly,” she added.

Ian Shepherdson, chief economist for Pantheon, goes even further, and even believes that “the Fed should not raise (its rates). Their job is done,” he tweeted.

And to warn: “Each new rate hike by the Fed from here only increases the risk of a totally unnecessary recession”.

He therefore considers it possible that the increase anticipated for this Wednesday will be the last of this cycle. Before a break.

Because the full effects of rate hikes take months to be felt in the economy.

The goal: to push banks to raise interest rates on loans to households and businesses.

– Avoid recession –

Faced with inflation, which reached its highest level in more than 40 years in June, it was necessary to slow down consumption to prevent prices from continuing their vertiginous escalation.

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A recruitment ad on a restaurant window on July 8, 2022 in Garden Grove, California (AFP/Robyn BECK)

“Insofar as we were starting from rates close to zero in the spring, it was necessary to act quickly. (…) It is now time to slow down the pace, without stopping it”, declared, on January 20, Christopher Waller, a Fed Governor.

Inflation thus fell in December to 5.0% over one year against 5.5% the previous month, according to the PCE index, favored by the Fed, which wants to bring it back to around 2%.

Another measure of inflation, the CPI index, on which pensions are indexed, also showed a sharp slowdown in December, to 6.5% over one year against 7.1%.

“The tightening of monetary policy will certainly cool the economy and lower inflation,” Pierre-Olivier Gourinchas, chief economist of the International Monetary Fund (IMF), told reporters on Friday.

But with consumption driving the US economy, too much tightening could lead to a recession.

However, “we still see a narrow possibility that the recession will be avoided in 2023 in the United States”, underlined Mr. Gourinchas, referring to “a significant slowdown in growth”, but without “necessarily” a contraction in GDP (product gross domestic) or even recession.

The day after the Fed, its European counterpart, the ECB, will meet. It started later than the Fed on rate hikes, and should raise them again, and even hint at further hikes.