The Fed: The US economy may find it difficult to avoid slipping into recession

A report presented by the US Federal Reserve (the central bank) warned that the US economy may find it difficult to avoid slipping into recession, as never before has a central bank succeeded in combating inflation without “economic sacrifice or a major recession.”
The report mentioned historical cases of “low inflation” in major economies dating back to the fifties, pointing out that central banks “will likely find it difficult to achieve their goals in terms of reducing inflation without sacrificing substantially economic activity.”
The report, prepared by economists within the framework of a symposium organized by the Booth School of Business at the University of Chicago in New York, said that the Federal Reserve will have to “tighten its policy significantly to achieve its inflation target by the end of 2025.”
Inflation rose again in January, despite the Federal Reserve raising interest rates about a year ago, with the aim of increasing the cost of borrowing, and thus slowing consumption and relieving pressure on prices. The study compared the current environment with the situation in the late 1970s, when then-Fed Chairman Paul Volcker dramatically raised interest rates to counteract an inflationary surge. As 40 years ago, the report indicated that the Federal Reserve is now too late to act.
The authors of the report wrote that the Volcker case “shows how costly it can be to reduce inflation after a central bank loses its credibility to control inflation,” noting that monetary policy at the time led to unemployment above 10 percent in the eighties.
However, the labor market has so far proven resilient with an unemployment rate as low as 3.4 per cent in January, while there remains a labor shortage. However, one of the governors of the Federal Reserve, Philip Jefferson, pointed out during the seminar that the “unprecedented” nature of the epidemic makes the current period different.
And he warned that economic models “if they are still useful on more than one level, their application is more difficult … and they should be used with caution in interpretation and judgment,” stressing the need to “study the data in an accurate and timely manner.”
And consumer spending in the United States increased by the most in nearly two years last January, with wage growth accelerating, while the pace of inflation rose, which increased financial markets’ fears that the Federal Reserve (US Central Bank) will continue to raise interest rates during the summer.
The data, contained in a Commerce Department report released on Friday, is the latest indication that the economy is nowhere near a much-worried recession. The report follows data released earlier in the month that showed strong job growth in January and the lowest unemployment rate in more than 53 years.
Consumer spending, which accounts for more than two-thirds of US economic activity, increased 1.8 percent last month, the largest increase since March 2021. Data for December was revised up to show spending falling 0.1 percent instead of 0.2 percent. As stated previously.
Adjusted for inflation, consumer spending rose 1.1 percent, which is also the largest increase since March 2021. What is known as real consumer spending fell in November and December. Consumer spending was likely driven by a 0.9 percent increase in wages.
The personal consumption expenditures index rose 0.6 percent last month, recording the largest increase since June 2022, after increasing 0.2 percent in December. In the 12 months through January, the index increased 5.4 percent, after rising 5.3 percent in December.