US repeats sharp rise in interest rates despite risk of recession

US repeats sharp rise in interest rates despite risk of recession

The Fed (Federal Reserve, the American central bank) announced this Wednesday (27) a new increase of 0.75 percentage point in its interest rate, raising the maximum target to 2.5% per year.

After a 0.75 percentage point increase last month and smaller moves in May and March, the Fed has already raised its key rate by a total of 2.25 points this year.

The focus of the credit crunch is to fight inflation in the United States, which is at 9.1%, the highest in four decades. Signs that the economy may slow to the point of driving the country into a recession, however, raise discussions about the calibration of US monetary policy.

Until March of this year, the target was an annual rate of no more than 0.25%. The rapid acceleration of the past four months represents one of the most rapid changes in US monetary policy. In addition, the Fed ended a billion-dollar asset purchase program.

Zeroing interest rates and buying bonds were measures adopted by the monetary authority to stimulate the American economy during the period when the Covid-19 pandemic imposed more restrictions on productive activities.

Since last year, with the advance of vaccination allowing the resumption of the circulation of people, the heating of consumption associated with a policy of low interest rates has been causing inflation to skyrocket.

But while little progress has yet been made in the fight against inflation, signs of economic stress are piling up and increasing pressure on Fed members as they assess how much monetary policy needs to be tightened to slow price rises amid risk that going too far could trigger a recession.

Even before this week’s policy meeting, the inflation problem was deemed so serious that investors reckoned there was a one-in-four chance the Fed would surprise markets with a rise of more than 1 percentage point.

As the Fed’s impact on the economy becomes more apparent, the question now is whether it is in danger of overreacting.

Part of the U.S. bond market is signaling a greater likelihood of recession, with yields on 2-year U.S. Treasury bills now higher than 10-year ones, a possible sign of a loss of confidence in near-term economic growth. and reflecting a possibility that the Fed could be forced to cut rates within a relatively short period of time.

With Reuters and AFP

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