The Fed will strike hard to get the US economy out of inflation

The Fed will hit hard to get the US economy out of inflation

The goal: to make credit more expensive to do slow down consumption and, ultimately, ease pressure on prices.

While inflation accelerated further in June, reaching 9.1% over one year, these new measures aim to make credit more expensive for households and businesses.

Faced with prices that continue to climb in the United States, the American Central Bank should strike hard on Wednesday to try to curb inflation, while taking care to protect the economy of the looming recession.

The monetary committee of the powerful Federal Reserve (Fed) should indeed announce a new sharp increase in key rates.

The meeting of the monetary policy committee (FOMC), which started on Tuesday, resumed Wednesday at 9 a.m. as planned, a spokesman for the Federal Reserve told AFP.

The decision will be announced at 2 p.m. in a statement, which will be followed by a press conference by Fed Chairman Jerome Powell at 2:30 p.m.

We expect the Fed to raise [rates] by 75 basis points, … carrying out the most aggressive tightening cycle since the 1980s, Gregory Daco estimates, chief economist of EY-Parthenon.

This is what it had already done at its previous meeting in mid-June, bringing rates to a range of 1.50 to 1.75%. It was then the biggest rise since 1994. This time, an even bigger one-point hike might even be on the table.

The objective: to make credit more expensive to slow down consumption and, ultimately, ease the pressure on prices. Inflation again reached a new record in June, at 9.1% over one year, unheard of for more than 40 years in the world's largest economy.

Consumption is the engine of the American economy, accounting for nearly three-quarters of GDP.

Jerome Powell, Chairman of the US Federal Reserve

The comments that Jerome Powell may make on the rate of increases that the institution envisages for the coming months will also be scrutinized and dissected by observers.

Powell will repeat that the Fed sees inflation as a scourge, especially for low-income households, and that policymakers are determined to bring it down, predicts economist Ian Shepherdson, of Pantheon Macroeconomics .

The Fed has indicated that it would take a drop in inflation for it to consider stopping raising rates, or at least slowing the rate hike. rate of increases. We expect this condition to be met by the time of the September meeting, adds Ian Shepherdson.

But the long-awaited economic slowdown to bring prices down could prove too strong, and push the world's largest economy into recession.

The European Central Bank (ECB) has also started to tighten its monetary policy, following many financial authorities. And the International Monetary Fund (IMF) said on Tuesday that it was essential that these institutions continue to fight inflation.

This will certainly not be without difficulty and a tighter monetary policy will inevitably have economic costs, but any delay will only exacerbate them, according to the IMF. The Fed is hoping for a soft landing.

The good health of the American economy should allow it to escape a recession, according to Joe Biden's Minister of Economy and Finance, Janet Yellen.

The IMF is less optimistic. The current environment suggests that the possibility of the United States escaping recession is slim, its chief economist, Pierre-Olivier Gourinchas, warned on Tuesday.

The international institution now only expects 2.3% growth in the United States for this year, 1.4 points less than in its last forecasts, published in April.

Gross domestic product (GDP) growth in the second quarter will be released on Thursday. It should have been very slightly positive, after a negative first quarter (-1.6%), thus saving the American economy from recession for this time.

If it were negative again, the world's largest economy would then enter a technical recession, with two negative quarters in a row.

The very definition of recession, however, is being debated across the country as this release approaches: is it two straight quarters of growth? negative? Or a broader deterioration in economic indicators, which is currently not the case?

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