Rising rates: the Fed will have to juggle between inflation and recession

Rate hike: the Fed will have to juggle between inflation and recession

The Federal Reserve, chaired by Jerome Powell, is expected to raise its key rates on Wednesday.

The US central bank, the Fed, still hopes to bring inflation down without triggering a recession. It should carry out a fourth sharp increase in its key rates on Wednesday. Finding the right balance will be a high-flying exercise.

They want to try to achieve what they call a soft landing, trying to avoid a recession, commented Julie Smith, professor of economics at Eaton's Lafayette University. , Pennsylvania.

The question is: can they do it? It's hard to answer at this point, she added.

The Fed's monetary committee will meet on Tuesday and Wednesday, and will another rate hike. These are currently in a range of 1.50 to 1.75%.

However, the institution must ensure that this voluntary slowdown in economic activity is not too severe, so as not to weigh down the labor market in particular.

The assumption of an increase of three quarters of a point (75 basis points), as at the last meeting in mid-June, thus seems to be unanimous. It was then the biggest hike 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).

The members of the monetary committee will probably discuss this hypothesis, according to Julie Smith, simply because the inflation figures remain very bad.

However, she believes, the other signs […] indicate that previous rate increases have most likely started to work, at least to slow demand [in] the housing market.

The real estate market, indeed, has slowed sharply due to exorbitant property prices and rising interest rates.

However, thousands of x27; job offers still do not find takers. And consumption is holding up, despite inflation-inflated sales.

Recent economic data supports a rate hike of 75 basis points, although a rate hike of 100 basis points could be considered, Kathy Bostjancic, chief economist for Oxford Economics, said in a note.

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Joe Biden's Minister of Economy and Finance Janet Yellen stressed again on Sunday that the US economy is slowing, but economic data isn' announce no recession.

I'm not saying we'll definitely avoid a recession, but I think there is a way to keep the labor market strong and bring inflation down, she said.

U.S. Treasury Secretary Janet Yellen says the data doesn't point to a recession.

The growth of the gross domestic product (GDP) of the United States in the second quarter will be published on Thursday and is expected to increase very slightly, after a negative first quarter (-1.6%). A recession is defined as two consecutive quarters of negative growth.

According to Yellen, however, a recession is a generalized contraction of the economy. And even if [second-quarter GDP] is negative, we're not in a recession right now, she insisted.

Former Fed Vice Chairman Donald Kohn, for his part, believes that a mild recession, with unemployment higher than the 3.7% forecast by the Fed for 2022, will be necessary to break this inflationary spiral, he said.

But the uncertainty is so huge, he added.

Faced with the prices of food, housing and cars, which continue to climb in the United States, the Fed has been gradually raising its key rates since March.

While inflation accelerated further in June, reaching 9.1% year on year (CPI index), this measure aims to make credit more expensive for households and businesses , in order to slow consumption and, ultimately, ease the pressure on prices.

Across the Atlantic too, inflation pushed the European Central Bank (ECB) to raise interest rates on Thursday by half a point, for the first time in over 10 years.

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