The Federal Reserve (Fed) has not yet closed its emergency action, which began in March 2022 after resting on its laurels, to combat inflation despite its great setback thanks to its aggressive policy in the last 16 months. After a break in the meeting held last June, which broke a streak of ten consecutive increases, this Wednesday interest rates rose again by a quarter of a point and the price of money remained between 5.25% and 5.50 %, the highest level in 22 years.
It was necessary to see if this decision was remembered as the last step of the central bank to crush the inflation inherited from the pandemic era, aggravated by the war in Ukraine. But those responsible, who unanimously agreed to the new rise, indicated their willingness to further increases in interest rates, without specifying a calendar, always based on "day-to-day" data, stressed Jerome Powell, president of the Reserve. He left the door open for an increase in September or to maintain the current level.
This total increase above 5% has led to a slowdown in the economy through the financial markets, by reducing asset prices and increasing the cost of borrowing. Despite the good news on inflation this month, which fell from the all-time high of 9.1% in June 2022, a record in half a century, to 3% the following year, the governors of the US central bank were motivated in their new increase in part because job hiring and economic activity since May have been stronger than they had forecast. So they want to certify that inflation really continues to drop, reaching the 2% set among their targets, before concluding the increases.
Core inflation, which excludes the prices of volatile items such as food or energy, had its smallest increase in more than two years last month. But many of the Fed's leaders want reassurance that that drop was not a fluke, as is apparent from their decision.
Powell accepted, when the parenthesis was adopted, that there could be another two increases throughout 2023. Analysts are now betting that they will keep rates at the same level in September, in a pause-and-rise cycle. Powell already acknowledged the idea of slowing the rate of increases in consecutive meetings and a quarterly rate could be expected if the economy evolves in line with current expectations, although this Wednesday he left things more up in the air.
The governors are looking for evidence that economic activity, the labor market and wages are slowing in their expansion, even if inflation falls a little faster than forecast in the June projections.
Some economists suggested that because wage increases lag behind consumer price growth, a slowdown in inflation might be enough on its own to justify and end rate hikes. However, the latest outlook for the world economy from the International Monetary Fund (IMF), published on Tuesday, pointed out that the inflationary cycle that began in 2021 has entered its last stage, but warned against excessive optimism. "It is clear that the battle against the recession has not yet been won," stressed that document, in which central banks were urged not to lower their guard prematurely.
The initiative to return to the charge after the parenthesis was an option highly criticized by progressive legislators. Mark Warner, a Democratic senator, said before hearing the news that it was time to settle the increases. “I'm actually worried about a quarter point increase, whether you're on the credit side or the commercial real estate side,” he said.
Even more emphatically, his colleague in the ranks Elizabeth Warren declared himself. The senator advised Powell not to take any more hikes. “We are already seeing alarming signs, such as rising unemployment among black workers, and if the Fed resumes its hawkish policy it could be devastating to our economy, disproportionately hurting marginalized communities,” she stressed. “If the pause is maintained, we will avoid the threat and risk of driving Americans out of work,” she added.
Despite the substantial economic improvement in the United States, as shown by the index of confidence in consumption or unemployment at the level of more than 50 years ago, citizens still do not experience security in this field, as the surveys show.
