To fight inflation, the Fed raises its rates and does not rule out a recession

The US Federal Reserve (Fed, central bank) increased its rates again on Wednesday, September 21, and it’s not over. It decided on a third consecutive increase of 0.75 points in its key rates, fixing the cost of short-term money in a range of between 3% and 3.25%. This is the highest level since 2008, at the start of the great financial crisis.

At its meetings in November and December, the monetary institution should, according to its own consumers, be further reduced on the credit score by 1.25 points. Ultimately, in 2023, the cost of money should exceed 4.5%. The surge is spectacular: rates were still almost zero in March since the start of the Covid-19 pandemic. This probable tightening is 1.2 points higher than consumers in June.

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“We will continue until we are satisfied that the job is done”, warned Fed Chairman Jerome Powell. So the idea that it is possible to fight inflation, which is at its highest level in forty years, by having minor rate hikes is definitely dead.

The Fed seems ready to take the risk of a pullback. “The chances of a soft landing are likely to diminish as policy needs to be more restrictive. But a failure to restore price stability would mean greater pain later.assured Mr. Powell. No one knows if this process will lead to a setback or, if so, how big that setback will be. » According to the central bank, growth should fall to +0.2% this year and +1.2% in 2023 (against +1.7% each year in its June estimate) while the unemployment rate should rise to 4.4% of the active population in 2023 and 2024, while it is close to historic lows (3.7%).

The Fed helps fight inflation

This hardening of tone has two explanations. principally, inflation is much more entrenched in the US economy than the Fed had hoped. The figure for August had the effect of a cold shower: admittedly, the increase in prices over one year fell back to 8.3% against a maximum of 9.1% in June, but this phenomenon is explained by the drop in fuel prices – the price per gallon fell from 5 dollars in mid-June to 3.68 dollars. This ebb cannot hide the fact that food continues to increase, as does housing, the first item in the index, with an annual increase of 6.2%.

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