The Fed will hit hard to get the US economy out of inflation

The Fed will hit hard to get the US economy out of inflation

The Federal Reserve Building in Washington, May 4, 2022 (AFP/Jim WATSON)

The Federal Reserve Building in Washington, May 4, 2022 (AFP/Jim WATSON)

In the face of prices that continue to rise in the US, the US central bank should strike hard on Wednesday to try to curb inflation, while being careful to protect the economy from a pending recession.

The monetary committee of the strong Federal Reserve (Fed) should announce a new sharp increase in key interest rates.

A Federal Reserve spokesman told AFP that the Monetary Policy Committee’s meeting, which began Tuesday, resumed Wednesday “at 09:00 (13:00 GMT) as planned.”

The decision will be announced at 2:00 PM (6:00 PM GMT) in a statement, followed by a press conference by Federal Reserve Chairman Jerome Powell at 2:30 PM.

“We expect the Fed to raise (interest rates) by 75 basis points, (…) to implement a tight tightening cycle since the 1980s,” said Gregory Daco, chief economist at EY Parthenon.

That’s what it actually did at its previous meeting in mid-June, raising interest rates to a range of 1.50 to 1.75%.

That was the largest increase since 1994. This time, a one-point larger increase could be put on the table.

The goal: to make credit more expensive to slow consumption and, eventually, to relieve pressure on prices. Inflation has already hit a new record again in June, at 9.1% in one year, unheard of in more than 40 years in the world’s largest economy.

Consumption is the locomotive of the US economy, accounting for roughly 3/4 of GDP.

– “Coincidence” –

Comments that Jerome Powell might make regarding the rate of increases that the institution envisages for the coming months will be scrutinized and dissected by observers.

“Mr. Powell will reiterate that the Fed sees inflation as a disaster, especially for low-income households, and that policy makers are determined to bring it down,” said economist Ian Shepherdson of Pantheon Macroeconomics.

The evolution of the Federal Reserve's prime key price since 1985 (AFP/)

The evolution of the Federal Reserve’s prime key price since 1985 (AFP/)

The Fed has indicated that it will take a decrease in inflation for it to consider stopping the rate hike, or at least slowing the pace of the increases. “We expect this requirement to be met by the time of the September meeting,” adds Ian Shepherdson.

But the long-awaited economic slowdown to bring down prices could prove too powerful and plunge the world’s largest economy into recession.

The European Central Bank (ECB) has also begun to tighten its monetary policy, thus following many of the financial authorities. The International Monetary Fund said, on Tuesday, that it is essential that these institutions continue to fight inflation.

This, of course, will not be without difficulties, and according to the International Monetary Fund, “a tightening of monetary policy will inevitably have economic costs, but any delay will only exacerbate them.”

The Fed is hoping for a “soft landing”.

– Stagnation? –

Good health should allow the US economy to escape the recession, according to Joe Biden’s Secretary of Economy and Finance, Janet Yellen.

Federal Reserve Chairman Jerome Powell in Washington, June 15, 2022 (AFP/Olivier Doolery)

Federal Reserve Chairman Jerome Powell in Washington, June 15, 2022 (AFP/Olivier Doolery)

The International Monetary Fund is less optimistic. The chief US economist, Pierre-Olivier Gornchas, warned on Tuesday that “the current environment suggests that the likelihood of the US escaping recession is slim.”

The international corporation now expects only 2.3% growth in the US for this year, 1.4 points lower than its last forecast, published in April.

The second quarter GDP growth will be announced on Thursday. It was supposed to be a bit positive, after the negative first quarter (-1.6%), thus saving the US economy from recession this time.

In the event that it turns negative again, the world’s largest economy will enter a technical recession, with two negative quarters in a row.

However, the very definition of recession is up for debate in the country as this post approaches: Is it two consecutive quarters of negative growth? Or a broader deterioration in economic indicators, which is not the case now?

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