The US Federal Reserve hopes that it will once again be able to slow inflation without causing an economic contraction, while it is expected to approve a significant increase in key interest rates, tomorrow, Wednesday. However, 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 deflation,” Julie Smith, an economics professor at Lafayette University in Eaton, Pennsylvania, told AFP.
“The question is whether they can make it happen,” she said. It is a difficult question to answer at the present stage.”
The Monetary Committee of the US Central Bank will hold a meeting, Tuesday and Wednesday, during which it will approve a new increase in interest rates, which currently range between 1.50 and 1.75%.
However, this deliberate slowdown of economic activity should not be severe enough to reflect negatively on the economy, and in particular on the labor market.
There appears to be consensus on the assumption of a three-quarter point increase (75 basis points), equal to the increase approved by the committee at its 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.”
What percentage increase?
A member of the Reserve Board of Governors, Christopher Waller, recently reported the possibility of a one-point (100 basis point) increase.
Smith believed that members of the Monetary Committee “will likely discuss” this hypothesis “just because the inflation numbers remain very bad in the United States.”
But she considered that “other indications (…) indicate that the previous increases in interest rates are likely to have an effect, at least to slow down demand in the housing market.”
In fact, the real estate market has slowed down sharply due to exorbitant property prices and rising interest rates.
However, employees still receive thousands of offers for jobs that cannot be filled, and consumption remains high despite the high sales volume due to the inflation rate.
“Recent economic data supports an increase in interest rates of 75 basis points, although a 100 basis point increase could be considered,” Kathy Postianic, head of economics at Oxford Economics, said in a note.
On Sunday, US Treasury Secretary Janet Yellen indicated that the US economy has “slowed”, but economic data will not portend a recession.
“I’m not saying we will avoid a recession permanently, but I think there is a way to keep the labor market strong and reduce inflation,” she said.
uncertainty
On Thursday, the US GDP growth rate for the second quarter will be published, and it is expected to be slightly higher, after it was negative in the first quarter (-1.6%). The economy is considered to be in recession when it records negative growth in two consecutive quarters.
However, Yellen considered that a recession “is a generalized contraction of the economy. Even if the GDP in the second quarter is negative, we are not currently in a recession.”
For his part, former Vice President of the Federal Reserve, Donald Kohn, told AFP that a “slight recession” with an unemployment rate higher than the rate projected by the Fed for 2022 (3.7 percent), “would be necessary to break the inflation spiral.”
“But the uncertainty is huge right now,” he added.
In the face of the continuous rise in the prices of food, housing, cars, and others, in the United States, the Federal Reserve has been gradually increasing its main interest rates since March.
This measure, in light of inflation that continued to accelerate in June to reach 9.1 percent at an annual rate, aims to make loans more expensive for households and companies alike, in an effort to slow consumption and thus relieve pressure on prices.
On the other side of the Atlantic, inflation also prompted the European Central Bank to raise interest rates on Thursday for the first time in more than a decade, admitting an even faster-than-expected half-point increase, ending the era of negative rates.
(AFP)