The Federal Reserve increases interest rates by 0.75 points, the largest increase since 1994

David AlandeteCONTINUECorrespondent in Washington Updated: 06/15/2022 20:23h

The United States Federal Reserve (Fed) has done this Wednesday, June 15, something not seen in three decades: it has increased its short-term reference interest rate by three quarters of a percentage point. This is a higher increase than previously forecast by the central bank itself and is a full-fledged confirmation that the central bank is clamping down on runaway inflation, and in turn triggers a growing fear that a recession is looming. .

Despite the strength of the labor market, in an area considered to be at full employment (3.6%), the North American financial authorities are deeply concerned about the galloping inflation, shot to its highest rise in 40 years, with an alarming 8.6 % year-on-year in May.

The Fed has raised its short-term benchmark rate by those three-quarters of a percentage point, to a range of 1.5% to 1.75%, considerably higher than the usual quarter-point hike. The benchmark rate had not been in that range since before the coronavirus pandemic that began more than two years ago. That announcement came at the end of a two-day meeting of the Fed's board of governors.

In the corresponding statement, the Fed also attributes the need for this measure to the Russian invasion of Ukraine. “Russia's invasion of Ukraine is causing tremendous human and economic hardship… The invasion and related events are creating additional upward pressure on inflation and weighing on global economic activity. Additionally, Covid-related closures in China will likely exacerbate supply chain disruptions," he said.

Other central banks, including European ones, are moving quickly against rising prices, even at the risk of triggering recessions. Indeed next month, for the first time in more than a decade, the European Central Bank itself plans to raise rates by a quarter of a point.

The US central bank is causing the borrowing costs of US businesses and consumers to rise, which will lead to a drop in consumption, with the aim of lowering inflation, but with the probable consequence of forcing an economic slowdown, just when those fears of a full-blown recession intensify.

The previous US president, Donald Trump, put a lot of pressure on the Fed to lower rates when the pandemic hit. Powell relented and made the first cuts since 2008, which were crucial, though not the only factor, for the current era of high debt, high consumption and inflation.

In late April, the White House revealed that the US economy slowed in the first quarter of 2022. Gross Domestic Product shrank to an annual rate of 1.4% through March, a turnaround from strong growth of the first quarter of 2021, which was 6.9%. Although it is true that a single quarter does not form a pattern of behavior, two consecutive periods of downward growth are a problem.

Powell and other members of the Fed board had pointed to consecutive increases of 50 basis points in May, something that their actions today deny. At his hearing in May, Powell himself openly dismissed the 75 basis point hike that has now occurred, saying "it's not something the committee is actively considering."

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