The Federal Reserve accelerates the tightening. It decided, with just one vote against, to raise Fed Funds rates by 75 basis points, bringing them to 1.5% -1.75% from the previous 0.75-1%. It is the first time since November 1994 that US monetary policy decides such an aggressive hike. He only voted against Esther L. George who would have preferred a 50 basis point hike, as announced by the Fed itself in May. The US central bank will also continue the reduction of securities decided in the previous meeting, in the same way.
Upward projections for this year
The reason for such an incisive move is already evident in the official statement. The implications of the war for the United States are no longer “highly uncertain,” as was indicated in May; and above all, the Fed no longer expects inflation to return to its target, even though it is “totally determined” to do whatever it takes to make it happen. Projections indicate a PCE price index to rise by 5.2% this year, against the 4.3% indicated in March, by 2.6% next year (from 2.7%) and by 2.2 % (from 2.3%) in 2024. Core inflation is expected to be 4.3% this year (from 4.1%), to 2.7% next (2.6%) and 2, 3% (unchanged) in 2024.
Expected rates over 3% in forced stages
The “dots”, the points that indicate the intentions of the governors on the future trend of interest rates, indicate a much more incisive tightening than expected also for the whole of 2022. The median of the individual indications for the end of the year leads to 3.25-3.50 % from 1.75-2% in March, a clear acceleration, to a level not seen since 2008. In the next four meetings this year, rates could therefore rise by 1.75 percentage points, less than 50 points base on any occasion. At the end of 2023 the cost of short-term official credit could rise up to 3.5-3.75%, while at the end of 2024 it could even drop slightly to 3.25-3.75%. On the other hand, the indications for the long term remain unchanged: 2.25-2.5%.
Growth picking up, but forecasts are on the downside
On the other hand, the diagnosis of the real economy contained in the official communiqué has relatively little changed. Growth now appears to be picking up, after the slowdown in the first quarter, job increases have been “robust”. However, GDP is expected to grow by 1.7% this year and next (from 2.8% and 2.2% respectively), and by 1.9% in 2024 (from 2%). Unemployment is forecast at 3.7% this year (from 3.5%), in 3.9% the next (from 3.5%) and 4.1% in 2024 (from 3.6%) in 2024.
Inflation expectations too high
In a press conference, President Jerome Powell linked the decision to the rise in inflation (8.6% in May) and above all to that of some measures of inflation expectations, which also rapidly return to 2% in the long term, as well as than from the new projections. Furthermore, real short-term rates are not yet positive.