The Fed raised its interest rate by half a point and further lowered its growth forecast
Interest rates are now in the range of 4.25-4.50%, the US central bank announced, which plans to keep hikes above 5%.
The second phase of the fight against inflation has begun in the US, where the central bank, after raising interest rates too sharply since the spring, is now slowing down and sharply reducing its growth forecast for 2023. The US central bank (Fed) increased the key interest rate by half a percentage point on Wednesday. It is currently in the range of 4.25-4.50%, the Fed said in a press release after the meeting that the decision was taken unanimously.
This is the highest level since 2007. And the Fed warned that it’s not time to stop: further hikes “will be appropriate,” the institution says. Its officials even plan to raise them above 5.00%, when they expected 4.6% in the previous forecast published in September. Fed Chairman Jerome Powell will hold a press conference at 14:30 (19:30 GMT).
Less rise due to inflation
This slowdown in interest rate hikes marks the beginning of a new phase in the fight against inflation, which has been the Fed’s priority for months. Faced with rates rising to their highest levels in more than 40 years, the Fed brought out its heavy artillery, raising its rate four times by three-quarters of a point, a rate it has not used before. Since 1994.
However, the Fed is slightly less optimistic about the inflation path than it was in September, and now sees it slowing to just 3.1% in 2023, based on the Fed’s PCE index, which it previously expected to be 2.8%. Wants to return 2%. For 2022, it expects 5.6% versus 5.4% three months ago. More “evidence” will be needed to be “convinced” that inflation is slowing steadily, Jerome Powell said.
The Fed also sharply cut its growth forecast for 2023, now to 0.5%, down from 1.2% previously. However, it increased it slightly to 0.5% this year against 0.2% previously. The agency is not talking about a recession for next year, despite risks that the fight against inflation could slow economic activity too much. As for the unemployment rate, currently at 3.7%, it sees it rising to 4.6% in 2023 and 2024, slightly higher than the 4.4% it previously predicted.
The Fed’s key rate, between 0 and 0.25% until March, was a floor level designed to support the economy during the Covid crisis by stimulating consumption. It was also due to particularly high levels of American savings at a time when many goods were becoming increasingly difficult to obtain due to global supply difficulties and labor shortages. As a result, prices soared. And if the decline has begun, it remains slow.
Thus, inflation decreased sharply in November and decreased to 7.1% against 7.7% in October. The figure, released before the start of the Fed’s meeting on Tuesday, appears to have finally convinced the dollar’s guardians to ease off on sharp rate hikes. In late November, Fed Chairman Jerome Powell warned: “The time to slow the growth rate of children may not come until the December meeting.”
It will take months to feel the impact of the Fed’s decisions. So consumption remains steady and the job market remains in very good shape. The labor shortage facing American companies is forcing them to raise wages to attract candidates and retain employees. “I don’t think we’re in a price-wage spiral,” Treasury Secretary Janet Yellen told reporters Thursday.
Joe Biden’s Secretary of the Economy and Finance believed that despite the “risks facing the economy”, the United States is “on the right track to slow inflation” and “recession is avoidable”. The European Central Bank (ECB), which will meet on Thursday, may also move to a second phase of the fight against inflation and reduce the pace after implementing unprecedented monetary tightening since July.