The Economy Today - The Fed Will Raise Its Policy Rate: The End Of Cheap Money

2022-05-04T09:17:55.952Z

Policymakers and investors will have all eyes and ears on Washington today to watch the Federal Reserve's decision. The U.S. central bank is set to raise...

The economy today

The Fed will raise its key rate: the end of cheap money

Audio 04:09

US Federal Reserve Chairman Jerome Powell, outside the Senate Banking Committee in Washington, February 12, 2020. © AP - Susan Walsh

By: Dominique Baillard Follow

3 mins

Policymakers and investors will have all eyes and ears on Washington today to watch the Federal Reserve's decision.

The central bank of the United States is preparing to raise its main interest rate sharply to curb inflation.

The maneuver is delicate: Jerome Powell must raise rates to bring down inflation.

At the risk of stifling growth.

With gross domestic product down in the first quarter, America's big moneymaker is walking on eggshells.

After procrastinating for a long time, too many say his critics, the President of the Fed is going to make a strong decision.

And to avoid shocks, he communicated a lot about his intentions.

This is why we expect an increase of +0.5% to start with.

It will be the first time since the year 2000 that such a significant increase has been decided and it will only be the beginning.

By the end of the year, the Fed's key rate could gradually climb to 2.5%.

A necessary increase to block inflation, which is now at 8.5%.

This sharp rise in rates comes in a fairly uncertain global environment

First with the war in Ukraine: it accelerated the inflationary trend.

Now, the prospect of a European embargo on oil and why not in the next few months on Russian gas could fuel this surge in prices.

The other unknown is China and its zero-Covid policy.

Strict confinements disrupt supply chains, this is another factor favorable to inflation.

It is therefore not certain that the Fed's major shift will be enough to control the rise in prices.

The Fed is also due to announce a program today to end support for the economy.

This is another risky job.

Since the financial crisis of 2008, the Fed has literally never stopped buying debt, public and private, to support the economy.

His shopping picked up again during the pandemic.

Its balance sheet has doubled in two years, it amounts to 9,000 billion dollars.

A mass from which it must gradually lighten.

Getting out of this so-called monetary easing policy is an unprecedented move, never experienced to date by the Fed or the other central banks that imitated it after 2008. All these unknowns give investors cold sweats.

Is the party over on the financial markets?

A new era which begins after a long euphoria favored by the rates at the floor level.

The money placed in bonds no longer brought in anything, so it was invested in shares, you could even borrow to play on the stock market since the cost of money was almost free.

The rise in interest rates changes the game.

It is a withdrawal for investors.

Some even fear a stock market crash, with bubbles that could start by bursting, particularly in American real estate.

This catastrophic scenario does not reflect the fundamentals of the American economy: consumption is robust and the labor market tight.

Investors will of course listen very carefully to Jay Powell's speech on US growth to coat his rate decision.

►In short

The summer season is off to a good start for Airbnb: the platform records record results in the first quarter

102 million nights booked is 34% more than in 2019, which became the reference year, the year before the Covid.

Its profits increase by 36%.

Airbnb expects to continue on this trajectory, with sustained current demand and a favorable outlook for the full year.