United States: the Fed still hopes to be able to slow inflation without triggering a recession

Inflation or recession, the Fed will again have to juggle. The American central bank, the Fed, still hopes to be able to slow down inflation without causing a recession. On Wednesday, July 27, it should proceed with a fourth sharp increase in its key rates. “They want to try to achieve what they call a ‘soft landing’, trying to avoid a recession,” Julie Smith, professor of economics at Eaton’s Lafayette University, told AFP. Pennsylvania. “The question is, can they do it? That’s a difficult question to answer at this point,” she added.

The Fed’s monetary committee will meet on Tuesday July 26 and Wednesday July 27, and will raise its rates again. These are currently in a range of 1.50 to 1.75%. The institution must however ensure that this voluntary slowdown in economic activity is not too strong, so as not to weigh down, in particular, the labor market. “I think a slight recession”, with unemployment higher than the 3.7% forecast by the Fed for 2022, “will be necessary to break this inflationary spiral”, anticipates however the former vice-president of the Fed Donald Kohn, in an interview with AFP. “But the uncertainty is so huge,” he added.

Another 75 basis point hike?

The hypothesis of an increase of three-quarters of a point (75 basis points), as at the last meeting, in mid-June, seems to be unanimous. It was then the strongest increase since 1994. “I think they will raise rates by 75 basis points. But we can always be surprised by the Fed”, however anticipates Julie Smith. One of the institution’s governors, Christopher Waller, recently opened the door to a one-point hike (100 basis points), which would be unheard of since the 1980s, when former Fed Chairman Paul Volcker was struggling with double-digit inflation.

The members of the monetary committee “will probably discuss” this hypothesis, according to Julie Smith, “simply because the inflation figures remain very bad in the United States”. However, she believes, “the other signs (…) indicate that the previous rate increases have most likely started to work, at least to slow demand (in) the housing market”. The real estate market, in fact, has slowed down considerably due to exorbitant property prices and rising interest rates.

But employees are always spoiled for choice among the thousands of job offers that do not find takers. And consumption is holding up, although the amount of sales is inflated by inflation. “Recent economic data supports a rate hike of 75 basis points, although a rate hike of 100 basis points could be considered,” said Kathy Bostjancic, chief economist for Oxford Economics, in a note.

Achieving the soft landing will take ‘skill and luck’

The health of the labor market and consumption offer the Fed “the leeway it needs to continue to raise the key rate quickly,” she said. And the possibilities of a successful “soft landing” are diminishing “as the probability of a recession increases”, warns the economist again. Achieving this will take “skills and luck”, Treasury Secretary Janet Yellen recently underlined, who nevertheless believes that the American economy is in good enough health to escape the recession.

Faced with the prices of food, housing, or even cars, which continue to climb in the United States, the Fed, since March, has gradually raised its key rates. While inflation accelerated further in June, reaching 9.1% over one year (CPI index), this aims to make credit more expensive for households and businesses, in order to slow consumption and, ultimately, ease pressure on prices.

Also on the other side of the Atlantic, inflation prompted the European Central Bank (ECB) to raise its interest rates on Thursday for the first time in more than ten years, surprising even by a faster movement than expected, with a hike by half a point, and ending the era of negative rates.

READ ALSO

Faced with inflation, the ECB raises its rates higher than expected

READ ALSO

Life insurance, Livret A, credit: the consequences of the ECB’s announcements

–

Receive our latest news

Every day, the selection of main info of the day.