The Fed will hit hard to pull the US economy out of inflation

With prices continuing to rise in the United States, the US Federal Reserve should strike hard on Wednesday to slow the economy and try to curb inflation while also anxious to protect the economy from the looming recession.

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 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, and at the time it was its biggest rise since 1994. An even larger one-point rise may even be on the table.

The goal: make credit more expensive, slow down consumption and ultimately reduce price pressure. In fact, inflation in June reached 9.1% over a year, a new record not seen in more than 40 years.

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.

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 said on Tuesday 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 compound them,” according to the IMF.

The Fed hopes for a “soft landing”.

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.

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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