US Fed may raise interest rates due to recession fears IG News

WASHINGTON: The Federal Reserve is set to make another big hike in interest rates on Wednesday as it tries to cool the economy to reduce inflation to the highest in 40 years, but fears of a recession are looming.

Rising prices that are putting pressure on American families and businesses have already become a political liability for President Joe Biden, as he faces midterm congressional elections in early November.

But the contraction of the world’s largest economy would be a more damaging blow to Biden, to the credibility of the Fed, and to the world at large.

Federal Reserve Chairman Jerome Powell has made it clear that officials will continue to act aggressively to cool the economy and avoid the last time US inflation spiraled out of control in the 1970s and early 1980s.

Tough action — and recession — was finally taken to bring prices down in the 1980s, and the Fed is unwilling to give up its hard-won, inflation-fighting credibility.

Many economists are expecting a consistent three-quarter point rate hike when the meeting ends on Wednesday, an unprecedented action since that era.

But there is a chance the Fed could opt for a full digit increase.

Powell and other central bankers are sending the same message: a recession is better than sustained high inflation, which will hurt, especially those who are least able to withstand it.

“Since inflation began to accelerate in early 2021, Fed officials have been overly optimistic that it will quickly lower the central bank’s 2% target,” economists Mickey Levy and Andrew Levine wrote in The Wall Street Journal.

“The economy now faces a serious risk of continued high inflation.”

The Fed rate hike was definitely seen after ugly inflation data

The Fed’s policy-making Federal Open Market Committee (FOMC) is due to announce its decision on Wednesday at 1600 GMT.

Powell’s press conference after the meeting will be closely scrutinized to see how much more the Fed will have to do before declaring victory in the inflation battle.

escape recession

Inflation is a global phenomenon amid the Russian war in Ukraine and the Covid lockdown in China at the top of the global supply chain, and other major central banks are also taking action.

European Central Bank President Christine Lagarde said on Tuesday that further increases would be needed to contain inflation.

American policymakers have the luxury of a strong job market and low unemployment, which gives it some leeway to deal with high prices.

Still, many economists say a short period of negative GDP will be needed, at least in the first half of 2023, before inflation subsides.

Despite a welcome drop in petrol prices at the pump in recent weeks, the disappointing consumer price report for August showed a broader rise.

But Ian Shepherdson of Pantheon Macroeconomics, who believes inflation is peaking, said incomes are rising amid rising wages, which bodes well for the outlook.

“The US economy is not in or going into recession,” he said in an analysis.

The Fed has stepped up its rate hikes, including two straight three-quarter-point hikes in June and July, cranking the benchmark lending rate four times this year.

The aim is to raise borrowing costs and calm demand, and it is having an effect: the housing market has slowed as mortgage rates rise.

Recent statements from Fed officials indicate more rate hikes are on the way, and no cuts until inflation is under control – dashing market expectations after July’s policy meeting .

The FOMC will also issue quarterly forecasts to members, showing how they feel about the direction of the economy and the impact of policy moves, and how quickly inflation will subside.

RELATED ARTICLES

Most Popular