Inflation ou récession, la Fed va de nouveau devoir jongler

Inflation or recession, the Fed will have to juggle again

The US Federal Reserve (Fed, central bank) is still hoping to rein in inflation without triggering a recession as it moves into a fourth sharp hike in interest rates on Wednesday.

“They want to try to achieve what they call a ‘soft landing’ by trying to avoid a recession,” commented Julie Smith, an economics professor at Lafayette University in Eaton, Pennsylvania. “The question is: can they do it? That question is difficult to answer at this point,” she added.

Interest rates are currently in a range of 1.50 to 1.75%. However, the institution must ensure that this voluntary slowdown in economic activity is not excessive, in order not to put a strain on the labor market in particular.

“I think a mild recession” with unemployment higher than the 3.7% forecast by the Fed for 2022 “will be needed to break this inflationary spiral,” but predicts former Fed Vice President Donald Kohn. “But the uncertainty is so great,” he added.

What increase?

The hypothesis of a 3/4 point (75 basis points) rise like last session in mid-June seems to be unanimous. It was the biggest hike since 1994 at the time. “I think they’re going to raise rates by 75 basis points. But we can always be surprised by the Fed,” predicts Julie Smith.

One of the institution’s governors, Christopher Waller, recently opened the door to a one-point hike (100 basis points), something unthinkable since the 1980s when former Fed Chairman Paul Volcker struggled with double-digit inflation .

Monetary Committee members “are likely to debate this hypothesis,” according to Julie Smith, “simply because inflation numbers in the United States remain very poor.”

However, she believes that “the other signs (…) suggest that the previous rate hikes have most likely started to work, at least to slow demand (in) the housing market”.

In fact, the real estate market has slowed significantly due to exorbitant real estate prices and rising interest rates. But employees are always spoiled for choice among thousands of job offers that cannot be found. And consumption is holding up, even though sales volumes are being inflated by inflation.

flexibility

“Recent economic data supports a 75 basis point rate hike, although a 100 basis point rate hike could be considered,” said Kathy Bostjancic, chief economist at Oxford Economics, in a statement.

The health of the job market and consumption gives the Fed “the leeway it needs to continue raising interest rates quickly,” she said. And the chances of a successful “soft landing” are dwindling “as the likelihood of a recession increases,” the economist warns.

It will take “skill and luck” to do that, said Treasury Secretary Janet Yellen, who nonetheless believes the US economy is healthy enough to emerge from the recession. In view of the constantly rising prices for food, housing and even cars in the USA, the Fed has been gradually increasing its key interest rates since March.

While inflation continued to accelerate in June, reaching 9.1% over a year, this aims to make borrowing more expensive for households and businesses in a bid to slow consumption and ultimately ease price pressures.

Source: AFP

The US Federal Reserve (Fed, central bank) is still hoping to rein in inflation without triggering a recession as it moves into a fourth sharp hike in interest rates on Wednesday. “They want to try to achieve what they call a ‘soft landing’ by trying to avoid a recession,” commented Julie Smith, professor…


#Inflation #recession #Fed #juggle

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