Unsurprisingly, for markets, the Federal Reserve raised its key rate by 75 basis points, between 3.75% and 4.00%, the highest level since January 2008.
The US central bank (Fed) hiked rates on Wednesday to the highest level in nearly 15 years and expects to continue raising them, trying at all costs to curb high inflation, a task complicated by the threat of a recession.
The Fed, as expected, raised its key rate by 0.75 percentage points, now between 3.75% and 4.00%. This is the highest level since January 2008.
And the institute’s officials also say they anticipate “that further rate hikes will be appropriate,” according to a statement released after two days of meeting.
However, they indicate that the effects on the economy of the increases already made since March will have to be taken into account in order to establish the pace of the increases which will be decided at the next meetings. This could signal slower increases in the coming months.
It takes months for these Fed decisions to have an effect on the economy.
Inflation, therefore, was still at 6.2% over one year in September, close to the highest levels for over 40 years, according to the Fed’s favored PCE index, which aims to bring it back to 2%.
Another measure, the CPI index, which refers in particular to the indexation of pensions, recorded a price increase of 8.2% over one year in September.
The hike in the reference rate decided on Wednesday is the sixth consecutive since March, when it was between 0.00 and 0.25%, at its lowest point to stimulate economic consumption during the Covid-19 crisis. The Fed started off with its usual 0.25 point hike, before accelerating to 0.50 and finally, four times, by 0.75 points.
Less than a week before the mid-term elections, during which President Joe Biden risks losing his weak Democratic majority in Congress, inflation is now the main concern of American families.
But another danger threatens, as this voluntary slowdown in activity risks plunging the US economy into recession in 2023.
“First signs” of slowing down
Jerome Powell warned at the end of the last meeting in September that there was no “painless way” to fight inflation in the long run.
Meanwhile, the United States recorded a quarter of growth between July and September, with GDP growth of + 2.6% at an annualized rate.
As for the job market, it still shows iron health. Official October data will be released on Friday, but we already know that private employers created 239,000 jobs in October, far more than September and far more than expected, according to data released Wednesday.
“While we are seeing the first signs of a Fed-induced slowdown in (labor) demand, this is affecting only certain sectors of the labor market,” commented Nela Richardson, ADP’s chief economist. , quoted in the press release.
The Democrats, who had centered their campaign on the right to abortion when the Republicans were playing the fight against inflation card, are now trying to carry out their economic program in favor of the middle classes.
Democratic Senator Sherrod Brown, chair of the Senate Banking Committee, sent a letter to Jerome Powell in late October, stressing that “the Fed’s fight against inflation shouldn’t hurt workers.”
The credibility of the powerful institution is at stake because, after ensuring for months that high inflation would only be temporary, it has so far failed to slow it down.
However, the more families expect sustained price increases, the more they act accordingly and the more they take root. This then calls for even more painful measures, as in the early 1980s, after years of inflation sometimes approaching 15%.
