The Fed could make the biggest rate hike since 1994

(Washington) The Federal Reserve’s (Fed) Monetary Affairs Committee began its meeting on Tuesday to raise interest rates to fight inflation and could even make the biggest hike in 27 years.

Posted at 11:12 am
Updated at 11:42 am

Julia Chabanas
Media Agency France

“The Monetary Policy Committee (FOMC) meeting started at 11 a.m. as scheduled,” a Federal Reserve (Fed) spokesman told AFP.

It concludes Wednesday at 12 p.m., followed by the release of a press release at 2 p.m. and a press conference by the institution’s President, Jerome Powell, at 2:30 p.m.

The key interest rate, which is currently in a range of 0.75 to 1.00%, should be raised for the third time in a row.

After rising by a quarter of a percentage point in March and then by half a point in May, further increases are expected. It could be half a point (which equals 50 basis points) or even three quarters of a point (75 basis points), which would be a first since 1994.

Economists expect another half-point hike, according to a consensus from Briefing.com.

But as of Tuesday morning, market participants overwhelmingly (96.1%) expected a gain of 75 basis points, according to CME Group’s futures product rating. They are betting that the Fed chair has said repeatedly that the institution will act on the data released.

However, the magnitude of inflation recorded in May surprised with an acceleration and a new 40-year high at 8.6% over the year and 1.0% over the month, according to the CPI index released on Friday.

growth, but not too much

Prior to this release, “We shared the general consensus that the FOMC would hike rates by 50 basis points […]. But the release of higher-than-expected inflation for May now leads us to expect a 75 basis point rate hike,” Wells Fargo economists Jay Bryson and Michael Pugliese said in a statement.

However, other analysts point out that such a hike would be useless as it could be interpreted as a panic move.

“As supply improves and demand for goods relative to services falls, margins will shrink and inflation will fall much faster than markets and the Fed are expecting,” Ian said. Shepherdson of Pantheon Macroeconomics in a statement.

An increase in key interest rates causes an increase in borrowing costs for private and commercial borrowers and thus a dampening of consumption.

However, at the risk of weighing on growth in gross domestic product (GDP) and employment. However, during an interview last month, the Fed chairman said growth was needed, but not too much, to contain inflation.

He also pointed out that this could happen through a modest increase in unemployment while the country faces a tight labor market and major labor shortages that are pushing companies to raise wages, which also contributes to inflation.

During this meeting, Fed officials will also update their economic forecasts, most recently from March. They should revise inflation and unemployment forecasts up and GDP growth forecasts down.

Fighting inflation is a priority for the Fed, but also for Joe Biden, who hosted Jerome Powell at the White House in late May for a rare interview on the subject.

The Monetary Committee is meeting for the first time since Jerome Powell officially began his second term on May 23 and Lael Brainard became the institution’s vice president. This Monetary Committee meeting also marks the arrival of two new governors, Lisa Cook and Philip Jefferson.

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