The US Federal Reserve is still hoping 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.
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“They want to try to achieve what they call a ‘soft landing’ and try to avoid a recession,” Julie Smith, an economics professor at Eaton’s Lafayette University, told AFP Pennsylvania.
“The question is, can they? That question is difficult 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.
“I think a mild recession” with unemployment higher than the 3.7% forecast by the Fed for 2022 “will be necessary to break this spiral of inflation,” however, predicted former Fed Vice President Donald Kohn in an interview with AFP.
“But the uncertainty is so great,” he added.
The hypothesis of a three-quarter point (75 basis point) rise like the last session in mid-June 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,” calculates 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.
“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 labor market and consumption gives the Fed “the necessary leeway 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 again.
It will take “skill and luck” to do that, as Treasury Secretary Janet Yellen recently pointed out, but she believes the US economy is healthy enough to emerge from a recession.
In view of the continuing rise in food, home and car prices 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 (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, inflation also prompted the European Central Bank (ECB) to hike rates for the first time in more than a decade on Thursday, even surprising with a faster-than-expected move of half a point hike, ending the era of negative interest rates.