The US Federal Reserve balances inflation and deflation

Washington (AFP)
The US Federal Reserve hopes that it will once again be able to slow inflation without causing an economic deflation, while anticipating its approval of a significant increase in key interest rates next 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 deflation.”
The Monetary Committee of the US Central Bank will hold a meeting on 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.
“I think a slight deflation” with unemployment higher than the 3.7% that the US central bank expects for 2022 “would be necessary to break this inflationary spiral,” former Federal Reserve Vice President Donald Kohn said in an interview with AFP.
It appears that there is a 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.”
A member of the Reserve Board of Governors, Christopher Waller, recently reported the possibility of a one-point (100 basis point) increase, which would be unprecedented since the 1980s, when Central Bank President Paul Volcker faced inflation above 10%.
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.”
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.
She believed that the strength of the labor market and consumption provides the Federal Reserve with the necessary margin of maneuver to continue to increase the key interest rate rapidly.
And it warned that the probability of a successful “soft landing” is declining “with the increasing possibilities of deflation.”
Treasury Secretary Janet Yellen recently stressed that achieving this requires “skills and opportunity,” saying that the US economy is in a good position to avoid deflation.
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% at an annual rate, aims to make loans more expensive for families and companies alike, in an effort to slow consumption and relieve pressure on prices.
On the other side of the Atlantic, inflation also prompted the European Central Bank to raise interest rates last 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.