half a point increase in key rates, a first since 2000

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Announcement by the US Federal Reserve, the FED, this Wednesday, May 4, 2022: increase in key rates by half a percentage point. A way to fight inflation and stabilize the economy. The United States is not alone. Central banks in emerging countries are also working to limit these inflationary pressures.

The American Central Bank announced, in an attempt to control inflation unprecedented for 40 years, an increase in its key rates by half a percentage point. This is a first for 22 years.

The Monetary Policy Committee (FOMC) thus raised these rates to a range of between 0.75% and 1%. Further increases will be on the table in the coming months, says Jerome Powell, the chairman of the FED.

As war in Ukraine and lockdowns in China add pressure on prices and logistics, Mr. Powell indeed points to further hikes of half a point, discussed on June 14-15, then July 26-27 .

In March, the Fed had already started to raise its rates, for the first time since 2018. It had raised them to a range between 0.25 and 0.50%, an increase of only 0.25 percentage points.

It had nevertheless announced that it would make six other increases this year, such as the number of meetings planned by the end of 2022. Since then, inflation has continued to climb, reaching peaks not seen since 1981.

fragile balance

Half a point is a lot at once, underlines our correspondent in Washington, Guillaume Naudin. This hasn’t happened since May 2000. But now, in March, prices were up 8.5% over one year.

Inflation is fueled in particular by energy prices, particularly those of fuel at the pump, which remain very high. Food prices are also on the rise, as are wages, another factor.

Employers are indeed faced with a labor shortage, and must create better conditions for their employees to attract or retain them, while the unemployment rate is at its lowest in the country.

Which is very good for employees, thus helping to drive prices up. We must therefore try to calm all of this, without, however, jeopardizing the American economic recovery, which has been very vigorous since last year.

However, this recovery seemed to run out of steam in the first quarter of 2022. GDP even contracted, although it is appropriate to start talking about a recession after only two consecutive quarters of decline.

On that, economists remain optimistic for the time being, as consumption, the main engine of US economic growth, is holding up. But it is clearly a delicate balance.

►Read again: The FED will raise its key rate: the end of cheap money

Land softly

For Mr. Powell, he is “ absolutely essential to lower inflation “. This is what he hammered home on Wednesday, noting that the labor market was ” extremely tense “, reaching a level qualified as “ unhealthy “.

Inflation is far too high and we understand the difficulties this causes. And we are acting quickly to bring it down. We have both the necessary tools and the determination it will take to restore price stability for the benefit of American families and businesses. The country’s economy has been through a lot in the past two years, and it has proven its resilience. It is essential that we bring down inflation in order to have a labor market that benefits everyone in the long term. From the point of view of the mission entrusted to us by Congress, to promote full employment and price stability, the situation is clear: the labor market is extremely tight and inflation is far too high. In this context, today, the monetary policy committee is raising its interest rate by half a point and expects key rate increases to be appropriate.

Jerome Powell, head of the US Federal Reserve

Fed leaders believe they can bring inflation back to their target of 2%, without raising rates above 3% so as not to affect demand. Jerome Powell talks about fork “ neutral “.

The Federal Reserve’s objective: to achieve a soft landing “, Hoping that “ economic and financial conditions evolve consistently with his expectations, explains Jay Powell.

For the time being, despite its confidence, the FED is therefore very far from its objective. And the subject is becoming a major political issue in this election year in the United States. However, for President Biden, this is a problem.

With agencies

A global movement to curb inflation

The Indian Central Bank created a surprise on Wednesday, announcing a 0.4% increase in its interest rates. Asia’s third-largest economy is suffering from high inflation due to the war in Ukraine. And is experiencing a surge in commodity prices. This monetary tightening in India, after two years of particularly low interest rates, could make it possible to stabilize prices.

A recipe also adopted by Brazil, where the Central Bank once again raised its key rate by one point, to 12.75%. This is the tenth consecutive increase since March 2021. Despite this, inflation continues to climb. It even intensified with the war in Ukraine, which had, as elsewhere, a strong impact on the cost of fuel and food in this country.

In South Africa, it has already been several months since the key rate was raised. Change in economic policy, after the declines of 2020, to mitigate the economic shock of the pandemic. Here again, it is now inflation that must be curbed. On the other hand, the movement is less followed in Asia where for the moment, only South Korea and Singapore have tightened their monetary policy.

Alexus Bedu,
economy service

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