The only worthwhile subject is inflation, which reached 8.5% in March, its highest level since 1981: “Inflation is far too high and we understand the difficulties it is causing, and we are acting quickly to bring it down”, declared Jerome Powell, the president of the Fed, at the end of the two days of meeting of the monetary committee of the American central bank. The latter took two decisions expected to cool the US economy. It raised its key rates by half a point, the first increase of such magnitude since the year 2000. The rates at which the Fed lends to banks are now in a range between 0.75% and 1% .
Second tool, the Fed will stop buying securities issued by financial institutions. This measure, intended to ensure market liquidity and to keep long-term interest rates artificially low to boost the economy, had led the bank to buy more than 9,000 billion dollars (8,480 billion euros) securities, or the equivalent of 40% of the American gross domestic product. The balance sheet will be reduced by 47.5 billion dollars per month from June, then by 95 billion from September.
These measures, voted unanimously by the monetary policy committee and announced at 2 p.m. in Washington, initially left the financial markets, which had anticipated them, unmoved. Then it was fireworks, which drove Wall Street soaring (3% for the S&P 500, which saw its biggest rise since May 2020, and 3.2% for the tech-heavy Nasdaq) and ten-year interest rates to fall (from 3% to 2.91%).
Rates close to 3% by the end of the year
The dollar interrupted its irresistible ascent, losing half a cent against the euro, which was at 1.06 dollars (against 1.20 a year ago). In question, the Powell effect, or more precisely the press conference of the President of the Fed, which was much less “hawkish” (in favor of a restrictive policy) than feared by the operators. For an hour, Mr. Powell continued to instill reasoned optimism about the US economy.
On rates, Mr. Powell explained that the idea of increasing rates by 0.75 points was not on the table, which immediately relieved the financial markets. He announced that the two meetings in June and July would probably lead to two more increases of half a point. Operators are now counting on rates close to 3% by the end of the year – a prospect that reassures them.
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