(Washington) The American central bank opted Wednesday for a first moderate increase in its key rates, in order to curb the frenzy of consumption of the Americans and thus to slow down inflation, stressing that the war in Ukraine could weigh on the economy.
The monetary institution had been preparing the markets for an increase in its key rates for months. It opted for a cautious increase of a quarter of a percentage point, placing them now in a range of 0.25% to 0.50%. The rates had been between 0 and 0.25% since March 2020.
The decision was taken almost unanimously. Only St. Louis Fed President James Bullard voted against, preferring to raise rates directly by half a percentage point.
At the end of a two-day meeting, the monetary policy committee highlighted the risks posed by the war caused by the Russian military invasion in Ukraine and the sanctions.
“In the short term, the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity,” the Fed said in its statement.
This first increase in key rates will be the first in a long series: the institution believes that additional increases will be “appropriate”. Most officials see rates climbing to the 1.75-2.00% range by the end of the year.
4.3% inflation in 2022
The Federal Reserve notes that economic activity and employment have continued to strengthen since the last meeting on January 25-26. But “inflation remains high” with the persistence of a mismatch between supply and demand.
The central bank has also revised its forecasts sharply upwards, now forecasting 4.3% inflation in 2022, almost double what it anticipated in its last forecasts in December. For 2023, it expects 2.7%, against 2.3% previously, then a further decline in 2024, to 2.3%.
The Fed is also less optimistic than in December about gross domestic product (GDP) growth this year, and now expects just 2.8% growth versus 4.0% previously. Its forecast remains unchanged for 2023, at 2.2%.
The last time the Fed raised interest rates was in December 2018, in the midst of a trade war with China. A decision that was strongly criticized by then-President Donald Trump.
Raising key rates pushes commercial banks to offer higher interest rates for the loans they grant to their customers, for the purchase of a house, a car or even a television, for example. .
This should therefore slow down consumption, to ease the pressure on prices. Especially since the supply problems should not be resolved anytime soon and the war in Ukraine has already caused an additional outbreak, for gasoline, but also food.
The equation seems simple: slow inflation while maintaining economic growth. But the unknowns are numerous, and the outcome uncertain.
Fed Chairman Jerome Powell recently said he was confident in the ability of the institution to ensure “a soft landing”, that is to say “control inflation without causing a recession”.
Another lever other than rates will then have to be activated to stop the rise in prices: reducing the Fed’s balance sheet, that is to say gradually parting with billions of dollars of Treasury bonds and other assets that it has purchased since March 2020, to support economic activity.
“The Committee plans to start reducing its holdings […] at a future meeting,” the Fed said on Wednesday, without elaborating.
Inflation in the United States rose to 7.9% year on year in February, according to the Commerce Department’s CPI index. The Fed favors another indicator, the PCE index: +6.1% over one year in January.
This price spike brings back the specter of double-digit inflation of the 1970s and early 1980s. price of a recession.
In Europe, where inflation is lower, the Fed’s counterpart, the ECB, decided on Thursday to maintain, at this stage, its rates at their historic low.
The Fed, meanwhile, is still waiting for the US Senate to confirm the appointments of several governors, including the renewal of Jerome Powell for a second term.
Economist Sarah Bloom Raskin, who had been chosen by Joe Biden for the key post of vice-president in charge of banking supervision, announced on Tuesday that she was giving up, for lack of sufficient support.