(Washington) A senior Federal Reserve (Fed) official said Thursday he was open to the idea of raising its interest rate by a percentage point, in what would be a first in more than 30 years, a time when the agency is putting all its energies into it used to calm runaway inflation.
Posted at 11:17 am
Updated at 1:28 p.m
Earlier in July, at the Fed’s Monetary Policy Committee (FOMC) meeting scheduled for July 26-27, Christopher Waller reiterated his support for another interest rate hike of three-quarters of a percentage point.
But on Wednesday, the Labor Department reported that consumer price inflation in the United States continued to accelerate in June, hitting 9.1% year-on-year.
While one of the Fed’s jobs is to keep inflation from spiking, this is “a disappointment of the first order,” Mr Waller estimated on Thursday, according to the text of a speech he was required to deliver.
A 0.75 percentage point hike in rates in this environment would be a “close to neutral” level in the sense that it “would not stimulate or constrain demand,” he argued. And as things stand, he would still be right.
But by the next FOMC meeting, if retail sales or real estate indicators are higher than expected, “that would have me leaning towards a bigger rise […] insofar as it would (show) that demand is not falling fast enough to bring inflation down,” he added.
Don’t cause recession
The Fed began raising interest rates aggressively in March to contain demand and calm this rise in prices, with one of its tasks being to ensure that inflation does not get out of control. It even increased it by three-quarters of a percentage point in June, the largest increase since 1994.
These interest rates, which govern loans to individuals and businesses, now range between 1.50% and 1.75%.
The Fed is scrambling to rein in inflation as its credibility is at stake, with officials claiming for months that rising prices – fueled by the strong recovery in economic activity, supply problems and more recently soaring energy prices – are only temporary would .
Current inflation, at its highest level since 1981, is threatening growth as consumption is the main driver of the US economy.
It’s also weighing on the popularity of American President Joe Biden, just months before a key election date with the renewal of a large chunk of the elected congressmen.
But the Fed must also be careful not to push the economy into recession with interest rates at levels that would discourage individuals and businesses from borrowing.
After Wednesday’s earnings release, the one-notch rate hike scenario gained traction at the next Fed meeting. This would be a first since at least 1990.
The Fed has not previously set interest rates directly, but has aimed for a target, and the last time that target was raised by at least a percentage point under Paul Volcker was in 1980.
“With inflation this high, it seems virtuous to tighten [la politique monétaire] fast” because it will boost confidence in the Fed’s ability to bring down inflation, Waller said.
The Bank of Canada decided on Wednesday to raise its interest rate by one point to 2.5% in a bid to combat inflation in the country to 7.7% in May.
The senior official also believed that although certain indicators suggested that “the risks of a recession had increased”, such a scenario remains “avoidable”, particularly given the strength of the labor market.
The number of vacancies is very high compared to the current low unemployment rate (3.6% in June), he reminded.