US central bank raises rates to keep up with inflation

The entire financial world was waiting for this confirmation.

The US central bank announced on Wednesday that it was raising its main key rate by 0.5%.

A minimal increase in appearance but, in fact, the Fed had not practiced such a recovery for twenty years.

And the consequences of this half point will be planetary.

"A long-awaited and almost obligatory decision to date to deal with inflation", according to Catherine Karyotis, professor of finance at Neoma Business School.

It reached 8.5% in the United States in April over one year.

Indeed, raising the cost of money makes it possible to reduce the sums in circulation and, therefore, to slow down the rise in prices.

A recovery that is not without risk for growth

The US central bank's key rates, which had hitherto been low, are finally moving.

They are now in a range of 0.75% and 1% and could continue to progress up to 3% at the end of the year, according to forecasts.

Further hikes "would be warranted" in the future, the Fed confirmed yesterday.

This monetary tightening is not without risk.

For Véronique Riches Flores, independent economist, "they are not saying that there is a fragility of the economic situation, because, for the moment, they prefer to save time and act at all costs on inflation".

The interest rate lever should be handled with care because high rates do not encourage investment and can slow down growth.

However, the war in Ukraine poses a heavy mortgage on the countries' GDP.

As for the financial markets, if everyone was hooked on the announcements of the Fed and its president Jerome Powell, the various stock markets have already anticipated this rate hike from the central bank.

But the future remains uncertain.

"We don't know if the correction will continue, how big it will be, or how long it will last," explains Frédéric Garcia, head of the trading room at Bourse Direct.

Bonds will be better remunerated, investors will turn away from the equity market which risks being confronted with declines.

The markets ended in the red on Wednesday, pending the Fed's decision, which fell at 8 p.m. (French time).

In Paris, the CAC 40 index closed down 1.24% to 6,395.68 points.

For investors, “you have to see the long term, not panic and keep cash,” advises Frédéric Garcia.

"For the moment, what is not sold, is not lost", reassures Catherine Karyotis, "the problem will arise for households who have urgent cash needs and will be forced to resell".

The cost of French debt could rise

The European Central Bank (ECB) could be forced to align itself with the Fed.

Indeed, monetary tightening in the United States is weakening the euro.

Imports of energy and goods will become more expensive for Europeans, further increasing inflation on the continent.

The consequences could be quick, as they are in the United States.

In France, the banks have already started to raise their interest rates "and the real estate market is weakening", observes Catherine Karyotis, who also notes, "a deterioration in new job offers, the trend is more uncertain than two months ago".

Difficulties that could aggravate the French debt.

Bercy regularly finances itself on the markets.

Until now, the rates were zero or even negative.

“If, soon, Bercy borrows at rates higher than current rates, to cover the operating costs of the country, then it will be necessary to reimburse more than what was planned, warns Frédéric Garcia of Bourse Direct.

The cost of debt will increase.

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