The Federal Reserve raised interest rates by 25 basis points to 0.25-0.50 percent. This is the first increase since 2018 to try to stem inflation which has risen to the highest levels of the last 40 years. He also indicated that “further rate hikes will be appropriate”. Reductions in the portfolios of purchased securities will also be decided at a forthcoming meeting, perhaps as early as May 4. The decision to raise rates by 25 basis points was not unanimous: James Bullard, the president of the St. Louis Fed – a well-known “hawk” – would have preferred a 50 basis point hike.
Acceleration of the hold
Economic projections also point to an acceleration of the squeeze: for this year, indications from individual governors now point to a median rate of between 1.75 and 2%, equal to six more rate hikes – practically a hike. by 0.25 percentage points in each of the next meetings until December – while at the end of last year only three were indicated in all of 2022. For 2023, four more increases from 25 basis points are also indicated, up to 2, 75-3%, while in 2024 the Fed funds could remain stationary.
The long-term rate, which can be considered an indication of the neutral rate, is only marginally lowered to 2.25-2.50: inflation is considered a cyclical phenomenon, which does not structurally modify the US economy. The Fed therefore imagines moving into decidedly restrictive territory for more than a year, as President Jerome Powell confirmed at a press conference: it is necessary, he said, “to bring rates to more neutral levels as quickly as practically possible. , and go further if it should be appropriate ». Some rate forecasts, he added, indicate “levels that are above the long-run neutral rate estimates”
Forecasts
The Fed’s move is linked to the forecast of a still solid economy, with inflation in any case destined to return towards two percent. The diagnosis shows “strong” progress in employment, with a labor market that is “extremely tight” – there are 1.7 vacancies for every unemployed person – but also high inflation due to the “pandemic, higher prices. energy and wider pressures on prices ».
The projections actually indicate a GDP in sharp decline this year, compared to previous forecasts (+ 2.8%, from the 4% indicated in December), but confirm the pace for 2023 (2.2%, as in December) and for 2024 (2%). The deceleration this year is certainly linked to the war – explained Powell – but it should not be emphasized: “It is still very strong growth,” he said, recalling that potential growth is around 1.75%.
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