In an attempt to curb inflation, the Fed raises its key rates again to 2.5%

Faced with prices that continue to climb in the United States, the American central bank, the Fed, announced on Wednesday July 27 a new sharp increase in key rates of 0.75 points. This is the fourth increase since March: 0.25 point in March, 0.5 point in May, and 0.75 point in June. This time, the increase takes key rates between 2.25 and 2.50%.

The meeting of the Fed’s monetary policy committee, the FOMC, began on Tuesday. 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 largest increase since 1994. The “monetary committee anticipates that further increases in key rates will be appropriate”the Fed said in a statement.

“Recent spending and production indicators have slowed”assures the Fed, referring to American consumption, the engine of the American economy, which accounts for nearly three-quarters of GDP. “However, job creations have remained robust in recent months, and the unemployment rate is still low”she added.

Inflation at 9.1% year on year in June

Another rate hike “unusually high” may be needed at the Fed’s next meeting in September, Fed Chairman Jerome Powell warned at a news conference. Inflation is “far too high”and the labor market “extremely tense”, he pointed out. However, he clarified that the September decision “will depend on the data published by then”.

The Fed said it would take a drop in inflation for it to consider stopping raising rates, or at least slowing the pace of hikes. The long-awaited economic slowdown to bring prices down could, however, prove too strong, and plunge the world’s largest economy into recession.

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The European Central Bank has also started to tighten its monetary policy, following many financial authorities. And the International Monetary Fund (IMF) said on Tuesday that it was essential that these institutions continue to fight against inflation. Of course, this will not be done without difficulty and “Tighter monetary policy will inevitably have economic costs, but any delay will only exacerbate them”, according to the IMF. The Fed hopes to achieve a “soft landing”.

According to the IMF, “slim possibility” of escaping the recession

The good health of the American economy should allow it to escape a recession, according to Joe Biden’s Minister of Economy and Finance, Janet Yellen. According to Mr. Powell too, the American economy can avoid this scenario. “We’re not trying to cause a recession and we don’t think we need to”did he declare. “We believe it is possible to bring inflation down while maintaining a strong labor market”he added.

The IMF is less optimistic. “The current environment suggests that the possibility of the United States escaping recession is slim”, its chief economist, Pierre-Olivier Gourinchas, warned on Tuesday. The international institution now expects only 2.3% growth in the United States for this year, ie 1.4 points less than in its latest forecasts, published in April. Second-quarter gross domestic product growth will be released on Thursday. It should be very slightly positive, after a negative first quarter (−1.6%), thus saving the US economy from recession for this time.

Should it be negative again, the world’s largest economy would then enter a technical recession. The very definition of recession, however, is the subject of debate in the country as this publication approaches: is it negative growth for two quarters, or a broader deterioration in economic indicators – which does not is not the case now?

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The World with AFP

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