The U.S. Federal Reserve, which hopes to ease inflation again without triggering an economic contraction, is expected to approve a substantial increase in key interest rates on Wednesday, but balancing the two approaches will be a delicate process.
“They want to try to achieve what they call a ‘soft landing’ by trying to avoid inflation,” Julie Smith, an economics professor at Lafayette University in Eaton, Pennsylvania, told AFP.
He added, “The question is whether they can achieve this. That is a difficult question to answer at this stage.”
The US Federal Reserve’s monetary policy committee will hold a meeting on Tuesday and Wednesday to approve a new hike in interest rates, which currently range from 1.50% to 1.75%.
However, this deliberate slowdown of economic activity should not be severe enough to reflect negatively on the economy, especially on the labor market.
Former Federal Reserve Vice Chairman Donald Cohn told AFP in an interview that a “minor contraction” with unemployment above the 3.7% expected by the US central bank for 2022 “is necessary to break this inflationary spiral”.
“But the uncertainty is huge,” he added.
There appears to be consensus on the assumption of a three-quarter point increase (75 basis points), which is equivalent to the increase approved at the committee’s last meeting in mid-June and the highest since 1994.
But Julie Smith said, “I think they’re going to raise rates by 75 basis points, but the Fed could still surprise us (by another percentage point).
A member of the Reserve Board of Governors, Christopher Waller, recently indicated the possibility of a one-point (100 basis point) increase, which would be unprecedented since the 1980s, when Fed Chairman Paul Volcker faced inflation above 10%.
Smith believed that the monetary committee members would “probably discuss” this hypothesis “because the inflation numbers in the US are so bad”.
But he opined that “other indicators (..) indicate that earlier increases in interest rates may have had an effect, at least in reducing demand in the housing market.”
In fact, the real estate market has fallen sharply due to exorbitant property prices and rising interest rates.
However, employees are receiving thousands of offers for jobs that cannot be filled, and consumption is high despite high sales volume due to the inflation rate.
“Recent economic data supports an interest rate of 75 basis points, although a 100 basis point increase could be considered,” explained Cathy Postianic, chief economist at Oxford Economics, in a note.
He believed that strength in the labor market and consumption provided the Federal Reserve with the “necessary maneuver to continue raising the key interest rate.”
It warned that the probability of a successful “soft landing” is diminishing with the “increasing probability of inflation”.
Treasury Secretary Janet Yellen recently emphasized the need for “capacity and opportunity” to achieve this, arguing that the US economy is strong enough to avoid deflation.
As prices of food, housing, cars and other goods continue to rise in the US, the Federal Reserve has been gradually raising its key interest rates since March.
The move is aimed at making loans more expensive for households and firms in an effort to curb consumption, easing pressure on prices in light of inflation continuing to rise to 9.1% annualized rate in June.
On the other side of the Atlantic, inflation spurred the European Central Bank to raise interest rates, ending an era on Thursday by agreeing to a faster-than-expected half-point increase for the first time in more than a decade. Negative ratios.
“Creator. Award-winning problem solver. Music evangelist. Incurable introvert.”
