The Fed will hit hard to pull the US economy out of inflation
The Fed building in Washington, May 4, 2022 (AFP/Jim WATSON)
With prices continuing to rise in the United States, the US Federal Reserve should strike hard on Wednesday to curb inflation while making sure to protect the economy from the impending recession.
The currency committee of the powerful Federal Reserve (Fed) is likely to announce another sharp increase in key interest rates.
The Monetary Policy Committee (FOMC) meeting, which began on Tuesday, resumed on Wednesday “as scheduled at 09:00 (13:00 GMT)”, a Federal Reserve spokesman told AFP.
The decision will be announced in a statement at 2:00 p.m. (6:00 p.m. GMT), followed by a press conference by Fed Chair Jerome Powell at 2:30 p.m.
“We expect the Fed to hike (rates) by 75 basis points, (…) conducting the most aggressive tightening cycle since the 1980s,” said Gregory Daco, chief economist at EY-Parthenon.
It had already done so at its last meeting in mid-June, bringing rates to a range of 1.50% to 1.75%.
It was then the biggest rise since 1994. This time, an even larger one-point rise could be on the table.
The goal: make credit more expensive, slow down consumption and ultimately reduce price pressure. In fact, in June, inflation hit another record high of 9.1% over a year, unheard of in the world’s largest economy for more than 40 years.
Consumption is the engine of the American economy and accounts for almost 3/4 of GDP.
– “opportunity” –
Observers are also scrutinizing and dissecting the comments that Jerome Powell may make about the rate of increases the institution is projecting for the coming months.
“Mr Powell will reiterate that the Fed views inflation as a scourge, particularly for low-income households, and that policymakers are determined to bring it down,” said economist Ian Shepherdson of Pantheon Macroeconomics.
Development of the key interest rate of the FED since 1985 (AFP / )
The Fed has indicated that it would take a fall in inflation to consider halting rate hikes, or at least slowing the pace of rate hikes. “We expect this condition to be met by the September meeting,” adds Ian Shepherdson.
But the long-awaited economic slowdown to drive prices down could prove too severe, sending the world’s largest economy into recession.
The European Central Bank (ECB) has also started to tighten its monetary policy, following many financial authorities. And the International Monetary Fund (IMF) said Tuesday it was important that these institutions continue to fight inflation.
This, of course, will not be without its difficulties and “tightening monetary policy will inevitably have economic costs, but any delay will only compound them,” according to the IMF.
The Fed hopes for a “soft landing”.
– recession? –
The good health of America’s economy should allow it to avoid a recession, according to Janet Yellen, Joe Biden’s Secretary of Commerce and Finance.
Fed Chair Jerome Powell on June 15, 2022 in Washington (AFP / Olivier DOULIERY)
The IMF is less optimistic. “The current environment suggests that the likelihood of the United States escaping recession is slim,” warned chief economist Pierre-Olivier Gourinchas on Tuesday.
For the USA, the international institution only expects growth of 2.3% for this year, i.e. 1.4 points less than in its last forecast published in April.
Gross domestic product (GDP) growth for the second quarter will be released on Thursday. After a negative first quarter (-1.6%), it should have turned out slightly positive and should have protected the American economy from a recession for the time being.
Should it turn negative again, the world’s largest economy would then enter a technical recession, with two negative quarters in a row.
However, the very definition of recession is being debated in the country as this release approaches: Is it two straight quarters of negative growth? Or a broader deterioration in economic indicators, which is not the case at the moment?
