The sharp rise in interest rates by the Federal Reserve (Fed) and the promises of further increases fuel warnings that the only way out of the scourge of inflation in the United States is a recession.
The Fed remains hopeful that it can curb activity and demand, cooling the breakneck pace of inflation, without derailing the world’s largest economy. But skepticism is growing about the chances of success.
The US central bank raised benchmark interest rates by three-quarters of a point on Wednesday, the biggest hike in nearly 30 years, and signaled a similar hike is possible in July.
The sharp rise came as the Fed faces intense pressure to rein in rising gas, food and housing prices, which have left millions of Americans struggling to make ends meet and sent indices plummeting. of approval of President Joe Biden.
The Fed has raised the main interest rate by 1.5% since March when the Russian invasion of Ukraine and ongoing supply chain problems stemming from the covid pandemic combined to push prices up at their fastest pace in more than four decades.
“Essential”
Fed Chairman Jerome Powell said recession is not the goal, but lowering inflation “expeditiously” is “essential” as it is vital to a healthy economy.
But Kathy Bostjancic, chief economist at Oxford Economics in the United States, warned that “it becomes very difficult to thread that needle.”
The Fed will need a scenario in which “a lot of things are in place at the right time,” he told AFP.
The healthy labor market and strong consumer demand, helped by a strong savings pool, play in the Fed’s favor and could support activity even as the economy cools.
Following the Fed’s decision, rates Mortgage rates soared to their highest level in 13 years, with the average 30-year, fixed-rate home loan reaching 5.78%.
Drivers still face gas prices of more than $5 a gallon at the pump, though for the first time in days, the national average dipped Wednesday, below Tuesday’s record.
“My colleagues and I are well aware that high inflation imposes significant hardships, especially on those least able to afford higher costs for essentials like food, housing and transportation,” Powell told reporters after the meeting. Announcement of rate hike.
higher unemployment
The White House tries to help the fall of prices through laws.
Biden on Thursday signed a shipping reform bill that will allow the government to sanction companies that raised shipping costs by up to 1,000%, which has a ripple effect for many products.
The measure “will put an end to shipping companies that take advantage of American families, farmers, ranchers and businesses, and will lower prices and give the American people a little breathing room,” the president said at the White House.
With the shift towards prioritizing aggressive tightening of credit conditions – which policymakers see rising to 3.8% next year – for now the best the Fed could hope for is a “soft” landing, which would include an increase in unemployment.
The economy has continued to create jobs. The unemployment rate in May was 3.6%, slightly above its pre-pandemic level, and there are almost two job openings for every unemployed person, up from 1.3 before Covid.
Powell said that “an unemployment rate of 4.1% with inflation on track for 2% would be a successful outcome.”
But he stressed that “events in recent months have raised the level of difficulty” in achieving a soft landing. It will probably “depend on factors that we don’t control,” he added.
However, a half-point increase in the unemployment rate can signal the start of a recession, which is usually defined as two quarters of negative growth.
Diane Swonk of consultancy Grant Thornton called the Fed’s outlook “fanciful.”
higher risks
Steve Englander of Standard Chartered Bank and a former Fed economist doesn’t expect a recession and said unemployment may not have to rise as high to meet the Fed’s targets.
But the central bank will have to reduce demand, and “it will be painful, even if it is not a technical recession,” he said.
“The risk of recession is rising and rising rapidly,” he told AFP.
However, it is a risk that the Fed is willing to take, as it has made fighting inflation its priority.
Bostjancic believes a soft landing is still possible, but warned that without strong action to contain prices, the United States could face stagflation – lower or negative growth with high inflation – something last seen in decades. of 1970 and 1980.
“The Fed is concerned that if inflation is not addressed now, it will linger and be a problem for many years,” he said.
