Raising rates should moderate demand and thus slow the rise in prices.

In March, the Federal Reserve (Fed) began a rather cautious rate hike (+0.25 percentage points), but it was the first since 2018.

At the end of its two-day meeting, the Monetary Policy Committee (FOMC) will endorse this time, unless surprised, an increase of half a percentage point, to bring them within a range of 0.75% at 1%.

It was Jerome Powell, the president of the powerful institution, who himself announced that this increase would be "on the table".

Speaking to a panel of central bankers on the sidelines of International Monetary Fund meetings, he then stressed that it was "absolutely essential" to restore price stability and to raise rates "rapidly" so that the Fed fulfill this prerogative.

Other Fed members were even more explicit about the need for aggressive policy in the face of ever-accelerating inflation and a tight job market.

Some therefore want similar increases to be recorded at least at the next meeting, in June.

There is an urgent need to act as inflation, aggravated by the Russian-Ukrainian war, is now at its highest level since the beginning of the 1980s.

The American Central Bank AFP

The PCE index, the one preferred by the Fed, showed a price increase of 6.6% in March over one year.

According to the other index, the CPI, which is calculated differently, inflation peaked at 8.5%, the fastest pace since December 1981.

Tightrope

The discussions promise to be intense, as the leaders of the powerful institution are on a tightrope.

Indeed, alongside inflationary pressures, also fueled by recent lockdowns in China that have accentuated problems in global supply chains, growth is slowing across the world.

The Fed's tools are considered the most effective in tempering demand and therefore slowing inflation.

In addition to interest rates, the Fed is expected to start reducing its balance sheet, another major step in normalization.

Calming demand without stalling it is the challenge, because consumption remains the main engine of US growth.

US Gross Domestic Product contracted 1.4% in the first quarter.

Not enough to change the course of the Fed, nevertheless believes Gregory Daco, chief economist at EY Parthenon, observing that this report reflects very strong domestic demand.

"Americans travel, although plane tickets are expensive, they go to the cinema, to the theater, the restaurants are full," he said in an interview with AFP.

Like many economists, he therefore expects the Fed to raise rates by half a point not just on Wednesday, but again at the June meeting.

Fed Chairman Jerome Powell at a conference in Washington, March 21, 2022 Samuel Corum GETTY IMAGES NORTH AMERICA/AFP/Archives

While a recession is not seen as imminent, some experts are not ruling it out early next year, should prices remain high despite rate hikes.

"The work of the Fed is extremely complex, not only because of the internal economic conditions which are difficult to interpret, but also because of a context of global economic recovery desynchronized", recognizes Gregory Daco.

Jerome Powell, who will hold his traditional press conference on Wednesday afternoon, will undoubtedly be in a hurry to say how many increases the committee intends to apply this year.

“If the Fed really wants to perform a soft landing,” in other words tighten monetary policy without plunging the economy into recession, “it needs to show where the landing strip is and when it counts. getting there will be a key element,” insists Gregory Daco.

But for the economists of BNP Paribas, "it is unlikely that Jerome Powell will give a precise figure" or a rate level targeted at the end of this meeting.

© 2022 AFP