fight against inflation | The Fed will hit hard to slow down the economy

(Washington) With prices rising in the United States, the US Federal Reserve should strike hard on Wednesday to slow the economy and try to contain inflation while looking to protect the economy from recession.

Updated yesterday at 11:20pm.

Julia Chabanas
Media Agency France

The currency committee of the powerful Federal Reserve (Fed), which meets on Tuesday and Wednesday morning, is likely to announce another sharp increase in key interest rates.

The decision will be announced at 2:00 p.m. (18:00 GMT) in a statement, 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, […] in 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, and it was then its biggest rise since 1994. An even larger one-point rise may even be on the table.

The aim: to make credit more expensive in order to curb consumption and eventually, relieve the price pressure. In fact, inflation in June reached 9.1% over a year, a new record not seen in more than 40 years.

“chance”

The comments that Jerome Powell is able to make on the rates of increase proposed by the institution for the coming months are also being scrutinized and dissected by observers.

“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,” predicts economist Ian Shepherdson of Pantheon Macroeconomics.

The Fed has indicated that it would take a fall in inflation to consider halting rate hikes, or at least slowing the pace. “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 has also started to tighten its monetary policy, following many financial authorities. And the International Monetary Fund (IMF) on Tuesday said it was important that these institutions continue to fight inflation.

This, of course, will not be without its difficulties and “tighter monetary policy will inevitably have economic costs, but any delay will only exacerbate them,” according to the IMF.

The Fed hopes for a “soft landing”.

Recession?

According to Janet Yellen, Joe Biden’s secretary of commerce and finance, the American economy’s good health should allow it to avoid a recession.

The IMF is less optimistic. “The current environment suggests that the United States is unlikely to emerge from recession,” warned its chief economist Pierre-Olivier Gourinchas on Tuesday.

For this year, the international institution only expects growth in the USA of 2.3% or 1.4 points less than in its last forecast, which was published in April.

Gross domestic product 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.

However, should it turn negative again, the world’s largest economy would enter a technical recession with two negative quarters in a row.

However, the actual definition of recession is a matter of debate in the country as this release approaches: is it two consecutive quarters of negative growth? Or a broader deterioration in economic indicators, which is not the case at the moment?

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