The Fed raised its key interest rate for the eighth straight time on Wednesday, but slowed the pace from previous hikes.

This first meeting of the year marks a return to the more usual quarter-point rhythm.

But further increases are to be expected, the institution warned.

“We are talking about a few more rate hikes to get to the level that we think is restrictive enough,” said the institution’s president Jerome Powell, during his press conference.

Because if the situation improves on the inflation front, it is too early to claim victory.

We observe "the beginning of disinflation", said the chairman of the Fed, but "inflation remains high", and the tightening of monetary policy takes time to fully take effect.

The Fed's key rate © Patricio ARANA / AFP

Thus, "although recent developments are encouraging, we will need more evidence to be convinced that inflation is slowing down for a long time", he insisted.

Possible to avoid recession

Moreover, rates, which are now in a range of 4.50 to 4.75%, should remain at a high level for a while, to continue to slow down economic activity and contain the rise in prices.

If the US economy slows and inflation falls “slowly” as expected, it will “not be appropriate to cut rates this year or ease monetary policy,” also warned Jerome Powell.

The Fed is also continuing to reduce its balance sheet, a movement that began in June, after having, during the Covid-19 pandemic, bought securities to flood the market with liquidity and allow it to continue to operate.

The Fed's monetary policy committee, the FOMC, also, in the press release published after its meeting, noted that “recent indicators show moderate growth in spending and production”.

The objective of the rate hikes, in fact, is to push the banks to raise the interest rates on loans to households and businesses, in order to slow down consumption and therefore prices to continue their vertiginous escalation.

But with consumption driving the US economy, too much tightening could lead to a recession.

During Jerome Powell's press conference, February 1, 2023 in Washington © SAUL LOEB / AFP

Jerome Powell considers it possible to "return to inflation of 2% without a really significant slowdown or a really significant increase in unemployment".

But unemployment, currently at 3.5%, could however rise to almost 5%, “it is quite possible”, he also underlined.

Solid labor market

The state of the labor market is being watched closely by the Fed, after two years of worker shortages that drove up wages, in the midst of high inflation.

Official employment figures for January will be released on Friday.

The unemployment rate could increase a little, to 3.6%, a level however still among the lowest of the last 50 years.

The number of job creations is expected to slow down to 187,000 from 235,000 in December, according to the consensus of Briefing.com.

A figure, published Tuesday by the Department of Labor, had seemed to persuade economists that inflation was now permanently on the right track: the average cost of an employee, with an increase in the fourth quarter less strong than those of the previous quarters.

The rise in consumer prices thus fell in December to 5.0% over one year against 5.5% the previous month, according to the PCE index, favored by the Fed, which wants to bring it back to around 2%.

Another measure of inflation, the CPI index, on which pensions are indexed, also showed a sharp slowdown in December, to 6.5% over one year against 7.1%.

Thursday is the ECB which will meet.

The European institution started later than the Fed to raise its rates, and should raise them again, and even hint at further hikes.

© 2023 AFP