The US executes the largest rate hike since 1994 to contain inflation

Jerome Powell, Chairman of the Fed.

The Fed raises the price of money by 75 basis points and lowers its growth forecast for this year from 2.8% to 1.7%

Clara Dawn

What just a few weeks ago seemed completely impossible, this Wednesday became a reality. The US Federal Reserve (Fed), in an almost historic decision, decided to raise interest rates by 75 basis points, leaving the reference rate in the range of between 1.5% and 1.75%. This is the largest increase since 1994 – under the presidency of Alan Greenspan – and makes it clear that the priority for the institution now commanded by Jerome Powell is the fight against inflation.

The movement has been much more aggressive than the 50 basis points anticipated by the market until a few days ago, when it was known that the IPC shot up to 8.6% in May. A figure that changed all forecasts and accelerated a much more aggressive speech that, according to some benchmark analysts such as Goldman Sachs, could be repeated at the July meeting.

In fact, the central projection of the institution itself indicates that interest rates will be between 3.1% and 3.6% in 2022, compared to the range between 1.6% and 2.4% estimated in March.

Economic risks

The Fed took advantage of its meeting on Wednesday to update its economic forecasts. And the cut in the growth estimate for this year has been more than remarkable.

Specifically, the institution now limits the momentum of the world's leading power to 1.7% for 2022, from the 2.8% expected in its previous macroeconomic chart.

For 2023, growth would be 1.7% (vs. 2.2% estimated in March). For its part, the estimate of the unemployment rate also rises from 3.5% to 3.7% for this year. And the key piece of the table: the agency sees inflation at 5.2% at the end of the year. A figure much higher than the 4.3% forecast just three months ago. Already in 2023 the reference would drop to 2.6%, approaching 2.2% in 2024.

"Inflation remains high, reflecting supply and demand imbalances related to the pandemic and rising energy prices," the agency explained yesterday. So Jerome Powell made it clear that the goal remains to get prices closer to 2% in the long run. "Inflation has surprised us again on the upside," he acknowledged during the press conference after the meeting. "We are absolutely determined to control it," he said. Powell indicated that he does not expect 75 basis point hikes to become commonplace. But he also did not rule out that the next July will reach those levels.

The argument of the 'hawks' – as the members of the Council who defend a more rapid tightening of monetary policy are known – seems forceful to justify a much more aggressive tone than, for example, that of the European Central Bank (ECB), which will undertake its first rate hike in 11 years in July.

To begin with, because the war in Ukraine affects its economy to a lesser extent. In addition, although inflation in the US and the euro zone share common causes such as the rise in energy prices, underlying inflation in the US is much higher, at 6.4%, than in the euro zone (3%).

Ricardo Murillo, an analyst at CaixaBank Research, explains that "a key factor to explain this is a higher incidence of bottlenecks." In a recent analysis, he recalls that the labor market, key to explaining inflationary pressures in the medium term, "is also much more stressed in the US", where data such as wage increases of more than 5% (compared to the euro zone, with rises of less than 2%).

Source link