The Federal Reserve has raised interest rates by 0.75 points for the third consecutive time. The Fed is adopting this policy to fight inflation, which is reluctant to come down despite previous rate hikes. Inflation fell from 8.5% in July to 8.3%, when the average forecast was for 7.7%.
This decision brings rates to between 3.0% and 3.25%. These levels have not been seen since 2008. The
projections
from the Federal Open Market Committee (FOMC), which decides monetary policy, point to interest rates between 4.0 and 4.5% before the end of the year.
Rates are rising at a rate not seen since Paul Volcker's presidency in the 1980s. Volcker was then faced with another era of very high inflation, as was the one that came from the 1970s. The big difference between that economy and the current one is that inflation coincided with high unemployment (stagflation), while current unemployment rates are very low by historical standards.
Jerome Powell vs Joe Biden
Federal Reserve Chairman Jerome Powell has acknowledged that inflation is at very high rates: "If you really look at inflation this year - tracking three, six and 12 months - you see that inflation is too high. It is at 4.5% or above. You don't need to know much more than that."
This statement contrasts with the
words
of President Joe Biden. In a recent interview given to the program
60 minutes
on
CBS
Biden acknowledged that the rate is high, but downplayed its recent evolution: "The rate is high," he said.I know it is the highest inflation in the last 40 years. But, in the last few months, we are in a situation where it did not shoot up. It was an even split.
Impact on employment and growth
The Fed raises interest rates in order to curb demand, thereby lowering inflation. But the contraction in demand also has effects on economic activity, and Federal Reserve Chairman Jerome Powell has warned of this: "If we want to light the way to another period of a very strong labor market, we have to put inflation behind us. I wish there was a way to do it without causing pain, but there isn't."
In fact, Jerome Powell has mentioned two aspects of the economy that will be affected by the rate hike. On the one hand, he acknowledges that it will affect employment: "We have certainly not given up on the idea that we may have a relatively modest increase in unemployment. However, we have to complete this task." The Fed expects the unemployment rate, currently at 3.7%, to reach 4.4% in 2023.
The other is activity. "No one knows whether this process will lead to a recession or, if it does, how significant that recession would be. That's going to depend on how quickly wage and price inflation pressures come down."
It is not just that interest rates are going to rise, but that they are likely to remain high for some time. The Wall Street Journal
quotes
economist Blerina Usuci of T. Rowe Price, who believes that "There is a message that rates will be high for longer, and that message has resonated with market participants".
