Inflation or recession, the Fed will have to juggle again

AFP, published on Sunday, July 24, 2022 at 19:22

The US Federal Reserve continues to hope that it will be able to curb inflation without triggering a recession. It was due to make a fourth sharp hike in interest rates on Wednesday, but finding the right balance will be a high-flying proposition.

“They want to try to achieve what they call a ‘soft landing’ and try to avoid a recession,” Julie Smith, an economics professor at Lafayette University in Eaton, Pennsylvania, told AFP.

“The question is, can they do it? That’s hard to answer at this point,” she added.

The Fed’s Monetary Committee will meet on Tuesday and Wednesday and hike rates again. These 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.

The hypothesis of a three-quarter point (75 basis point) rise like in the last session in mid-June thus seems to be unanimous. It was the strongest increase since 1994.

“I think they will hike rates by 75 basis points. But we can always be surprised by the Fed,” Julie Smith calculates.

– What increase? –

One of the institution’s governors, Christopher Waller, recently opened the door for a one-point hike (100 basis points).

Monetary Committee members are “probably going to discuss this hypothesis,” said Julie Smith, “simply because inflation numbers remain very bad.”

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 down significantly due to exorbitant real estate prices and rising interest rates.

Thousands of job offers are still not finding takers. And consumption is holding up despite inflation-inflated sales.

“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.

Joe Biden’s Secretary of Commerce and Treasury, Janet Yellen, reiterated on Sunday that the US economy was “slowing down” but that economic data were not pointing to a recession.

“I’m not saying we’re definitely going to avoid a recession, but I think there’s a way to keep the job market strong and lower inflation,” she said.

– insecurity –

United States second quarter gross domestic product (GDP) growth will be released on Thursday and is expected to increase very slightly after a negative first quarter (-1.6%). A recession is defined as two consecutive quarters of negative growth.

However, Yellen said a recession “is a general contraction in the economy. And even if (Q2 GDP) is negative, we are not in a recession right now,” she stressed.

For his part, former Fed Vice Chairman Donald Kohn believes that “a mild recession” with unemployment above the Fed’s forecast of 3.7% for 2022 “will be necessary to break this inflationary spiral.” he told AFP.

“But the uncertainty is so great,” he added.

In view of the continued rise in food, home and car prices in the USA, the Fed has been gradually raising its key interest rates since March.

While inflation continued to accelerate in June, reaching 9.1% over a year (CPI index), this aims to make borrowing more expensive for households and businesses in order to slow consumption and ultimately ease pressure on prices .

Across the Atlantic, too, inflation prompted the European Central Bank (ECB) to hike interest rates by half a point on Thursday for the first time in more than a decade.