Interest rates: Fed fights inflation “everything you need”

A few days before the FOMC (Monetary Policy Committee) in June, inflation again surprised with growth in the United States, + 8.6% in May year on year, the highest level since 1981. One of the factors that caused inflation The rebound was clearly the rise in gasoline prices, which are now about 25% higher than previous highs in history. This increase in gasoline prices probably contributed to a sharp rise in inflation expectations.

And these elements led bond markets to question the Fed’s strategy in May to raise the key rate by 50 basis points (0.5 percentage points) in June and another in July. Moreover, the sharp rise in interest rates was intensified two days before the FOMC by an article in the Wall Street Journal (WSJ), which columnists widely called a “leak,” which claimed that the Fed would raise key rates. points instead of the increase of 50 basis points discussed so far.

In the end, the leak in the WSJ was … good, as the Fed raised the Fed’s target range by 75 basis points to 1.50 / 1.75%, down to Covid. The strange element was that Esther George, the most hawk (hawk, supporter of tighter monetary policy) FOMC members voted for an increase of 50 basis points, not an increase of 75 basis points… which shows that 2022 is undoubtedly a special year when falcons become pigeons, and vice versa. .

Jerome Powell was very transparent about the reasons for the larger-than-expected rate hike: in fact, recent inflation and the recent rise in inflation expectations have prompted a change in the plan. In this regard, Powell says: “We do not see progress on inflation, but we want to see progress.” Moreover, like Christine Lagarde last week, Powell began his press conference by insisting that inflation is the number one problem above all else, saying: “At the Fed, we understand the challenges of high inflation. We are working hard to reduce inflation, and we are moving fast towards that. “

For the next FOMC, in late July, Powell made it clear that the choice would be to raise the rate by 50 or 75 basis points. The “points”, ie the forecasts of the federal funds of FOMC members, were very sharply revised upwards, with the range of federal funds was 3.25 / 3.50% at the end of 2022, which would mean an increase of 175 basis points in key rates from present until the end of the year. One can, for example, imagine a further increase of 75 basis points in July, then by 50 in September, by 25 in November and by 25 in December. The rate will depend on the following inflation rates…

But above all, much of the debate at the FOMC has focused on the likelihood of an imminent recession. First of all, growth forecasts have been sharply revised downwards and are now lower than potential for 2022, 2023 and 2024. This is the first time in at least 10 years that the next three-year growth forecast is below potential, which is probably a sign of fever. The set of economic forecasts also indicates a slow rise in unemployment over the next 3 years.

For Jerome Powell, the economic forecasts are consistent with a soft landing (economical soft landing)… but he also said it was famous soft landing it may not be due to things that the Fed cannot control, such as rising commodity prices. In this regard, we can not prove that it is wrong, because in May, consumption slowed down mainly due to the explosion of prices on the pump. The highlight of the conference was that Powell noted that it is becoming increasingly difficult to control inflation without causing a recession.

In conclusion, this FOMC shows the Fed’s determination to curb high inflation, even if it involves economic casualties. The new version of “everything you need”, you can say «

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