The US Federal Reserve raised its key rate to curb inflation

International 27 July, 2022

Faced with the continuing rise in prices in the US, the US central bank, the Fed, announced on Wednesday, July 27, a new sharp increase in the key rate by 0.75 points. This is the fourth increase since March: 0.25 points in March, 0.5 points in May and 0.75 points in June.

The meeting of the Fed’s Monetary Policy Committee, FOMC, began on Tuesday, July 26. At its previous meeting in mid-June, the FOMC had already raised rates to a range of 1.50 to 1.75%. This was the biggest increase since 1994. This time, an increase of 0.75 points leads to the fact that the key rates range from 2.25 to 2.50%. «The Monetary Committee expects that a further increase in key rates will be appropriate», – the Fed commented in a press release.

«Recent spending and production figures have slowed», – the Fed says, referring to U.S. consumption, the engine of the U.S. economy, which accounts for almost three—quarters of GDP. «However, job creation has remained steady in recent months and the unemployment rate remains low», – she added.

Comments that Jerome Powell may make regarding the rate of increase that the institution envisions in the coming months will also be carefully studied and analyzed by observers. «Mr. Powell will repeat that the Fed considers inflation a scourge, especially for low—income households, and that policymakers are determined to reduce it», – predicts economist Ian Shepherdson of Pantheon Macroeconomics.

The Fed said it would take a reduction in inflation to consider stopping rate hikes, or at least slowing the pace of increases. «We expect that this condition will be fulfilled by the time of the September meeting», – adds Ian Shepherdson. However, the long-awaited slowdown in economic growth aimed at lowering prices may be too strong and plunge the world’s largest economy into recession.

The European Central Bank has also begun to tighten its monetary policy, following many financial authorities. And the International Monetary Fund (IMF) said on Tuesday that it is extremely important that these institutions continue to fight inflation. This, of course, will not be without difficulties, and «a tighter monetary policy will inevitably entail economic costs, but any delay will only aggravate them», the IMF believes. The Fed hopes for a «soft landing».

According to the Minister of Economy and Finance Joe Biden Janet Yellen, the good health of the American economy should allow it to avoid a recession. The IMF is less optimistic. «The current situation suggests that the probability of the US coming out of recession is low», – warned chief economist Pierre-Olivier Gurinchas on Tuesday.

The international institution now expects only 2.3% growth in the US this year, i.e. 1.4 points less than in its latest forecasts published in April. On Thursday, data on the growth of gross domestic product for the second quarter will be published. It should be very weakly positive after a negative first quarter (-1.6%), thereby saving the US economy from recession for this time.

If it turns negative again, the world’s largest economy will enter a technical recession. The very definition of a recession, however, is the subject of debate in the country as this publication approaches: negative growth in two quarters or a broader deterioration in economic indicators – which is not there now?