Towards a 4th sharp hike in the Fed's key rates this week

The American central bank, the Fed, still hopes to be able to slow down inflation without causing a recession.

Towards a 4th sharp hike in the Fed's key rates this week

The American central bank, the Fed, still hopes to be able to slow down inflation without causing a recession. It should carry out a fourth sharp increase in its key rates on Wednesday, but finding the right balance will be a high-flying exercise.

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"They want to try to achieve what they call a 'soft landing', trying to avoid a recession," Julie Smith, an economics professor at Eaton's Lafayette University, told AFP. Pennsylvania.

“The question is, can they do it? This is a difficult question to answer at this stage,” she added.

The Fed's monetary committee will meet on Tuesday and Wednesday, and will raise its rates again. These are currently in a range of 1.50 to 1.75%.

The institution must however ensure that this voluntary slowdown in economic activity is not too strong, so as not to weigh down, in particular, the labor market.

“I think a slight recession”, with unemployment higher than the 3.7% forecast by the Fed for 2022, “will be necessary to break this inflationary spiral”, anticipates however the former vice-president of the Fed Donald Kohn, in an interview with AFP.

"But the uncertainty is so huge," he added.

What increase?

The hypothesis of an increase of three quarters of points (75 basis points), as at the last meeting, mid-June, seems to be unanimous. It was then the strongest increase since 1994.

“I think they will raise rates by 75 basis points. But we can always be surprised by the Fed”, however anticipates Julie Smith.

One of the institution's governors, Christopher Waller, recently opened the door to a one-point hike (100 basis points), which would be unheard of since the 1980s, when former Fed Chairman Paul Volcker was struggling with double-digit inflation.

Members of the monetary committee “will probably discuss” this hypothesis, according to Julie Smith, “simply because the inflation figures remain very bad in the United States”.

However, she believes, "the other signs (...) indicate that the previous rate increases have most likely started to work, at least to slow demand (in) the housing market".

The real estate market, in fact, has slowed down considerably due to exorbitant property prices and rising interest rates.

But employees are always spoiled for choice among the thousands of job offers that do not find takers. And consumption is holding up, although the amount of sales is inflated by inflation.

"Flexibility"

“Recent economic data supports a rate hike of 75 basis points, although a rate hike of 100 basis points could be considered,” said Kathy Bostjancic, chief economist for Oxford Economics, in a note.

The health of the labor market and consumption offer the Fed "the necessary leeway to continue to raise the key rate quickly," she said.

And the possibilities of a successful "soft landing" are dwindling "as the probability of recession increases", warns the economist again.

Achieving this will take “skills and luck,” Treasury Secretary Janet Yellen recently pointed out, who believes, however, that the US economy is in good enough health to escape recession.

Faced with the prices of food, housing, or cars, which continue to climb in the United States, the Fed, since March, has been gradually raising its key rates.

While inflation accelerated further in June, reaching 9.1% over one year (CPI index), this aims to make credit more expensive for households and businesses, in order to slow consumption and, ultimately, ease pressure on prices.

On the other side of the Atlantic too, inflation pushed the European Central Bank (ECB) to raise its interest rates on Thursday for the first time in more than ten years, surprising even by a faster movement than expected, with a hike by half a point, and ending the era of negative rates.

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