wait and see. The US central bank (Fed) announced on Wednesday a pause in its rate hikes, for the first time since March 2022 and after ten consecutive hikes, in order to take the time to observe the evolution of the economy.
The Fed’s monetary policy committee (FOMC), meeting since Tuesday morning, unanimously decided to keep the main key rate within the range of 5.00-5.25%.
This pause should allow “to assess the additional information and its implications for monetary policy”, detailed the Fed in a press release.
“This gives the economy a little more time to adjust, pending our next decisions,” Fed Chairman Jerome Powell said at a press conference.
Because rate hikes are a very effective tool for discouraging consumption and investment, and thus easing the pressure on prices. But their full effects take time to be felt. And to tighten too much, it is economic growth that would be threatened. Especially since the recent banking crisis has made banks more hesitant about the loans they grant to their customers, leading to effects similar to a rise in rates.
Probable future rises
Nevertheless, the cycle of increases should resume, perhaps as soon as the next meeting, at the end of July. “Almost all of the participants see it as probable that new rate hikes will be necessary this year to bring inflation down to 2%”, underlined Jerome Powell, referring however to “a moderate pace”.
The majority of Fed officials see rates rising to 5.50-5.75%, and even 6.00-6.25% for one of them. However, two members of the committee expect rates to remain at this level. Before, however, falling again from 2024, to 4.25-4.50%.
The prospect of additional increases nevertheless plunged the New York Stock Exchange, which turned red after the publication of the Fed’s press release, and closed in dispersed order on Wednesday evening.
Some economists, however, do not believe in future rate hikes, “because inflation will continue to weaken in the second half of this year and into next,” said Ryan Sweet, chief economist for Oxford Economics, stating that if the Fed continued to raise rates, “it would increase the chances that the central bank would push the economy into a recession”.
The specter of a recession recedes
Debates among Fed officials began on Tuesday morning, two hours after the release of US inflation figures in May, which had slowed sharply to 4.0% year on year from 4.9% the previous month. , according to the CPI index, the lowest level since March 2021.
Inflation is now half as high in the United States as in June 2022, when the peak of 9.1% was reached. However, this remains well above the 2.0% targeted by the Fed, in the maneuver to extinguish this surge in prices, but the institution is beginning to see its objective.
The FOMC has also very slightly lowered its inflation forecast this year in the United States, to 3.2% against 3.3%, but has, on the other hand, raised its forecast for growth of the domestic product to 1.00%. gross (GDP) US for 2023, against 0.4% expected in March.
The feared recession therefore no longer seems to be a reality. Jerome Powell expressed confidence that he could bring inflation back to around 2% without seeing economic activity collapse and jobs be destroyed on a massive scale.