The Fed is poised for another rate hike, perhaps the biggest since 1994

The prospect has been moving the markets since the beginning of the week: The American central bank, the powerful Fed, could announce the largest interest rate hike since 1994 on Wednesday in order to fight against inflation that is not abating.

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A half-percentage-point rise seemed certain a few days ago.

However, the inflation figures for May released on Friday had the effect of a cold shower: the rise in prices did not slow down, as it did in April. With 8.6% over a year, it even reached a new record for 40 years.

Markets and some economists were quick to conclude that rates could also rise more than expected, not more than half a percentage point (or 50 basis points) but three quarters of a point (or 75 basis points).

Should the Fed’s Monetary Affairs Committee (FOMC) make such a decision, it would be the largest rate hike in more than 27 years.

“We’re very confident that the Fed will hike just 50 basis points today, but the market and media frenzy of the last few days … obviously makes 75 basis points much more likely,” lamented economist Ian Shepherdson of Pantheon Macroeconomics, in a note.

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“This more aggressive action” was “unnecessary as the forces that led to the latest inflation figures are already fading,” he said.

The decision will be announced on Wednesday at 14:00 (18:00 GMT) after the meeting. The Institution’s President, Jerome Powell, will hold a press conference at 2:30 p.m. (18:30 GMT).

This is the third time in a row that key interest rates, which are currently in a range of 0.75 to 1.00%, will be raised.

Increases in interest rates increase the cost of loans that commercial banks extend to their retail and business customers.

“Clearly, the Fed accepts the accusation that it is behind the curve (of rate hikes) and is determined to catch up to avoid further deterioration in inflation expectations,” David Wessel, Fed specialist at the Brookings Institution, told AFP. who advocates an increase of 75 basis points.

The Fed is struggling all the more to contain inflation because its credibility is at stake. Those in charge have been claiming for months that this price hike is only temporary, so they only started tightening the screws in March.

“In hindsight (…) it probably would have been better to raise rates sooner,” admitted Jerome Powell in an interview with the Wall Street Journal last month.

Joe Biden’s Secretary of Commerce and Finance, Janet Yellen, also admitted that she did not expect such a price increase.

The Fed is independent of the federal government, but Jerome Powell was recently hosted by Joe Biden at the White House along with Janet Yellen for a rare interview on inflation.

However, the central bank must be careful not to plunge the economy into a recession by deliberately slowing down the economy. Jerome Powell had last month estimated that growth is needed, but not too much, to contain inflation.

He also stressed that this could happen through a modest increase in unemployment while the country faces a major labor shortage, which is pushing companies to increase wages, a phenomenon that also helps fuel inflation.

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

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 meeting also marks the arrival of two new governors, Lisa Cook and Philip Jefferson.

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