(Washington) 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.
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.
Regarding goods, inflation has been slowing “for some time now. It’s still too high, but it’s going down, ”said Jerome Powell.
“Ready to step up the pace”
On the other hand, the situation is different on the services side. While housing prices are rising more slowly now, “everything else, i.e. financial services, health, travel and leisure, all of that is the source of the inflation we have now”, a explained the chairman of the Fed.
The next meeting of the institution takes place on March 21 and 22. And the rise in rates could start again: if necessary, “we would be ready to accelerate the pace of rate increases”.
The Fed had slowed the pace in recent months, even returning to its usual quarter-percentage-point hike. But the tide could therefore be reversed, and the majority of market players expect a further increase of half a point, according to the assessment of CME Group.
These statements panicked Wall Street, which suddenly plunged into the red after these statements, and closed lower on Tuesday evening.
The dollar jumped, as did the interest rate on 2-year US government bonds, to its highest level since 2007. The 10-year rate also rose, briefly returning above the 4% threshold.
This has accentuated the phenomenon of yield curve inversion, when short-term rates are higher than long-term rates, often considered to be the harbinger of an economic recession. The gap has not been so high since 1981.
“Far” from a recession
“Jay” Powell also warned that the policy rate could remain elevated “for some time” as “January’s data on jobs, consumer spending, manufacturing output and inflation partly reversed the easing tendencies”, which were taking shape the previous month.
Inflation rose 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 to 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 since 1969, at 3.4%.
Jerome Powell, however, was reassuring, saying that “it seems that we are far from anything resembling a recession”.
The boss 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, “difficult to estimate”, “could be extremely negative and cause damage long-term “.