New Fed rate hike, inflation is definitely strong

published on Sunday, September 18, 2022 at 1:55 pm

The central bank of the US (Fed), determined not to allow inflation to settle permanently, should decide, Tuesday and Wednesday at its meeting, a new sharp increase in its key rates, however of the economic threat.

Housing, food, new cars, etc.: the increase in prices remained stronger than expected in August, finally convincing the herd of pigs to act. At + 8.3% for a year, the growth of the CPI inflation index has certainly slowed down a bit, thanks to the fall in the price of petroleum, but the rate is very high.

The world’s largest economy shows some signs of a timid slowdown in demand, in real estate that looks sad, or even in the manufacturing sector.

But “not surprisingly, the Fed will raise rates again by 75 basis points,” predicts Nancy Vanden Houten, economist at Oxford Economics.

The monetary institution, which has raised key rates four times since March, has resorted to this increase, the largest since 1994, in June and then in July.

Its European counterpart, the ECB, also hit inflation at the beginning of September, and raised its rates by 75 basis points, its key rates, unheard of since the creation of the euro.

– “Burning numbers” –

Most market participants expect the Fed to raise rates on Wednesday by 75 basis points (three quarters of a percentage point), according to CME Group’s futures products valuation.

But a larger increase of one percentage point (100 basis points) cannot be ruled out.

The “hot numbers” on inflation “increased pressure on the Federal Reserve to raise rates by one percentage point,” said Diane Swonk, chief economist at KPMG.

“This will be one of the most difficult and most political decisions. This marks the first step of the Federal Reserve towards a real economy,” he added.

Slowing down economic activity without causing a recession, increasing the number of unemployment but not too much, … This is a dangerous balancing act that awaits the powerful institution.

There is a “danger” of recession”, recently recognized by the Minister of Economy and Finance of Joe Biden, Janet Yellen, who confirmed however that the priority is to prevent the increase in prices.

The rise in rates should “lead the United States” to a short recession, warned for its part Dana Peterson, chief economist of the Conference Board, on Friday in a press conference.

Key rates exceeding 4% could cause “deeper and possibly longer economic slowdowns”, he added.

– Economic forecasts –

In addition to its rate decision, the Fed will update its forecasts for GDP growth, inflation and the unemployment rate.

“Do updated economic projections suggest a recession?” asked Nancy Vanden Houten.

Former US Treasury Secretary Larry Summers, who was one of the first in 2021 to warn of an “overheating” economy, also leans towards an increase of one percentage point, for “Improving the credibility” of the Fed, in that is, it shows that it works effectively against inflation, he tweeted.

Because the American central bank, which for a long time considered this period of inflation as temporary, now wants to act before history repeats itself.

“Time is running out,” Fed Chairman Jerome Powell said recently, as the specter of the inflation of the 1970s and 1980s loomed.

For almost ten years, prices have soared, rising in some months by nearly 15% a year, and the Fed’s attempts to control it have failed.

Its president at the time, Paul Volcker, had to take drastic measures to permanently reverse inflation, which led to a deep recession and unemployment of over 10%.

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