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demand slows amid fears of recession (Beige Book)

Fed official opens door to one-point rate hike

Washington (awp/afp) – A senior official of the American central bank (Fed) said Thursday that he was open to the idea of ​​a one percentage point increase in its key rate, which would be the first since more than 30 years, when the institute put all its energy into calming galloping inflation.

At the beginning of July, Christopher Waller repeated that he was in favor of a further increase in key rates by three quarters of a percentage point at the meeting of the Fed’s Monetary Policy Committee (FOMC), scheduled for July 26 and 27.

But on Wednesday, the Labor Department reported that consumer price inflation accelerated further in June in the United States, hitting 9.1% year on year.

While one of the Fed’s missions is to ensure that inflation does not soar, it is “a disappointment of the first order”, estimated Mr. Waller Thursday according to the text of a speech that he had to pronounce.

Raising rates by 0.75 percentage points in this environment would be an “almost neutral” level in the sense that it would “not stimulate or restrain demand”, he argued. And as things stand, he would always vote that way.

But if, between now and the next FOMC meeting, indicators on retail sales or real estate are higher than expected, “that would make me lean towards a larger increase (…) insofar as that (would show) that demand is not slowing fast enough to bring inflation down,” he added.

Don’t cause a recession

The Fed started in March to raise key rates aggressively to curb demand and calm this rise in prices, one of its missions being to ensure that inflation does not get out of control. It even raised them by three-quarters of a percentage point in June, its biggest increase since 1994.

These rates, which set the tone for loans granted to individuals and businesses, are now in a range of between 1.50% and 1.75%.

The Fed is scrambling to rein in inflation as its credibility hangs in the balance, with officials claiming for months that rising prices – fueled by the strong recovery in activity, problems at the supply and more recently the surge in energy prices- would only be temporary.

Current inflation, at its highest since 1981, threatens growth as consumption is the main driver of the US economy.

It also weighs on the popularity of American President Joe Biden, a few months before an important electoral deadline with the renewal of a large part of the elected representatives of Congress.

But the Fed must also be careful not to push the economy into recession with rates at such a level that they would discourage individuals and businesses from borrowing.

After the release of the price numbers on Wednesday, the scenario of a one point rate hike at the next Fed meeting gained traction. This would be a first since at least 1990.

The Fed did not previously set key rates directly but aimed for a target and the last increase of at least one percentage point on this target, decided under Paul Volcker, dates from 1980.

“With inflation so high, it seems virtuous to tighten [la politique monétaire] quickly” because it will boost confidence in the Fed’s ability to bring inflation down, Waller said.

The Bank of Canada on Wednesday opted for a one-point increase in its key rate to 2.5% in order to fight against inflation, to 7.7% in May in the country.

The senior official also estimated that while certain indicators suggested that “the risks of a recession had increased”, such a scenario remained “avoidable”, in particular in view of the solidity of the job market.

The number of vacancies, compared to the current low unemployment rate (3.6% in June), is very high, he recalled.




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