The Federal Reserve’s main rate, raised by a quarter of a percentage point, now stands between 5.25 and 5.50 percent, the highest level since January 2001. The decision was made unanimously by the 11 voting members of the Monetary Policy Committee (FOMC).
This new increase will further increase the interest rates on loans granted by households and companies.
This is the 11th since March 2022, and Fed officials did not specify, in their press release, whether or not they plan to continue raising rates in the coming months.
“The committee will continue to evaluate additional information and its implications for monetary policy,” the institution simply stated.
And during his press conference, the president of the Fed, Jerome Powell, refrained from advancing one hypothesis or another: “I would say that it is possible that we will raise rates again during the September meeting if the data justify it. And I would also say that we may choose to remain at the same level during this meeting.
“We will make careful assessments, as I said, meeting after meeting,” he added, noting that the Federal Reserve’s monetary policy is now considered “restrictive and putting downward pressure on economic activity and inflation.”
However, the central bank’s monetary policy is bearing fruit: inflation fell in June to its lowest level since March 2021, to 3.00% year-on-year, according to the CPI index.
But Jerome Powell insisted that this price increase is still “much higher” than the Federal Reserve’s 2% target, and that there is still “a long way to go” before reaching it.
Especially since core inflation, that is, excluding food and energy prices, remains at 4.8% in one year. House prices, in particular, continue to rise.
“We believe, and most economists think, that core inflation is a better signal of where inflation is headed. (…) Therefore, we would like core inflation to decrease,” Powell explained.
The Federal Reserve, however, is leaning toward another measure, the PCE index, for which June data will be released on Friday.
“Balance between the two risks”
At the June meeting, most Fed officials were in favor of raising rates to 5.50-5.75%, another increase after Wednesday’s.
The rates were, until March 2022 and since the beginning of the pandemic, at zero, to stimulate economic activity through consumption, but then the US central bank progressively increased the cost of credit in the face of record inflation for 40 years.
And if we tighten it too much, it threatens a recession. A scenario, however, that Fed economists no longer foresee, because the economy is proving very resilient, said Jerome Powell.
The head of the Federal Reserve, however, reported a “balance between the two risks.” The risk of doing too much or not enough,” between inflation and recession, and “we are reaching a point where there really are risks on both sides.”
US GDP (gross domestic product) growth in the second quarter will be released on Thursday morning, the day after the Federal Reserve meeting. An annualized growth of 2.00% is expected, as in the first quarter.
The next inflation figures, but also employment and even growth, will be decisive.
The International Monetary Fund (IMF), which published its updated forecasts on Tuesday, foresees growth of 1.8% this year in the United States.
The European Central Bank (ECB), which will meet on Thursday, a day after the Federal Reserve, also seems determined to continue raising its rates.