To fight inflation, the Fed raises its rates and does not rule out a recession

The New York Stock Exchange, September 21, 2022.

The US Federal Reserve (Fed, central bank) increased its rates again on Wednesday, September 21, and it's not over. It decided on a third consecutive increase of 0.75 points in its key rates, fixing the short-term cost of money in a range between 3% and 3.25%. This is the highest level since 2008, at the start of the great financial crisis.

At its meetings in November and December, the monetary institution should, according to its own forecasts, further tighten the credit screw by 1.25 points. Ultimately, in 2023, the cost of money should exceed 4.5%. The surge is spectacular: rates were still almost zero in March since the start of the Covid-19 pandemic. This probable tightening is 1.2 points higher than the June forecast.

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“We will continue until we are satisfied that the job is done”, warned Fed Chairman Jerome Powell. Thus, the idea that it is possible to fight inflation, which is at its highest level in forty years, by having minor rate hikes is definitely dead.

The Fed seems ready to take the risk of a recession. “The chances of a soft landing are likely to diminish as policy needs to be more restrictive. But a failure to restore price stability would mean greater pain later.assured Mr. Powell. No one knows if this process will lead to a recession or, if so, how deep that recession will be. » According to the central bank, growth should fall to +0.2% this year and +1.2% in 2023 (compared to +1.7% each year in its June estimate) while the unemployment rate is expected to rise to 4.4% of the active population in 2023 and 2024, while it is close to historic lows (3.7%).

Fed determined to fight inflation

This hardening of tone has two explanations. First, inflation is much more entrenched in the US economy than the Fed hoped. The August figure had the effect of a cold shower : admittedly, the rise in prices over one year fell back to 8.3% against a maximum of 9.1% in June, but this phenomenon is explained by the drop in fuel prices – the price per gallon fell by 5 dollars in mid-June at $3.68. This ebb cannot hide the fact that food continues to increase, as does housing, the first item in the index, with an annual increase of 6.2%.

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