The Federal Reserve is meeting this week with one key goal in mind. It’s enough cooling of the economy to slow down rapid inflation.
The potential to pull it off without putting the country in recession is getting slimmer.
Investors, consumers, as the Federal Reserve is preparing to take a proactive stance to curb sustained inflation (likely to discuss raising interest rates by three-quarters on Wednesday) And economists are increasingly hoping that it could turn into a recession next year. Even researchers who believe that central banks can still achieve a “soft landing” that leads the economy to a more sustainable path without causing unemployment spikes or complete contractions narrow the path to optimistic results. I admit that I am.
“It wasn’t clear if a soft landing would be feasible,” said Michael Ferroli, chief US economist at JP Morgan. “The difficulty is probably going up.”
This issue is due to US inflation data, which is becoming more and more concerned. Consumer prices in May accelerated to a pace of 8.6%, the fastest since 1981. Hotel room rates have skyrocketed. Exacerbating the problem, inflation expectations are higher, according to two recent reports.
Data suggest that the Fed may need to act more resolutely to control prices, further slowing consumer and corporate spending and employment markets.
Prior to last week’s inflation report, central bankers were expected to rise 0.5 percentage points again this week and in July. But now, the Fed may argue that it will act more quickly to counteract inflationary pressure before it becomes a permanent feature of the economic background. Many economists also predict that interest rates may continue to rise above the usual quarter-point increment until or beyond September.
The Federal Reserve has already raised a quarter of points in March and 0.5 points in May twice this year. More drastic actions, such as making mortgages and business loans more expensive, terminating corporate expansion plans, and squeezing the labor market, will increase unemployment and increase the likelihood of economic contraction.
Understand inflation and its impact on you
For months, the Fed has acknowledged that the path to slowing inflation is likely to be an unpleasant path. When the central bank raises the federal funds rate, it excludes the economy as a whole, slowing down consumer and corporate demand, and ultimately squeezing wages and prices. The way to curb inflation is essentially to cause a bit of financial distress.
Still, top policymakers have expressed consistent optimism that the US labor market has started from a strong position and may be able to cool inflation without eradicating recent advances in the job market. I am. With so many jobs per unemployed, the logic is advanced and it may be possible to limit sufficient conditions to improve the balance between the supply of workers and the demands of employers.
“We think we have a good chance of a soft or soft landing,” Federal Reserve Chair Jerome H. Powell said in a press conference after the central bank’s May meeting. “The economy is strong and in a good position to deal with tighter monetary policy,” he added.
But someone feels pressure for the Fed’s policies to work and must stop spending. And as inflation becomes higher and more stubborn, it will take more pressure on demand to line it up.
In fact, JP Morgan’s Ferroli said the federal economic forecast, which was released for the first time since March after the conference, showed a significant slowdown in growth and an increase in unemployment to show that policy makers are serious. Regarding economic restraint and price control, which may indicate.Unemployment Now at 3.6%This is below the 4 percent level that Fed officials believe a healthy economy can sustain in the long run.
If the Fed has to slow the economy significantly, doing so without causing a recession will be a challenge. For one thing, when the unemployment rate soars, the recession tends to continue. The recession occurred when the unemployment rate rose 0.5 percentage points from the recent lows on average over three months. Therm rulesAfter economist Claudia Therm.
Another reason is that interest rates are a slow tool, they work behind the scenes, and the Fed can simply overdo it.
Investors are afraid of bad results. Stocks sank into the bear market on Monday as investors were nervous about the central bank trying to spur a recession to curb inflation.
Priya Misra, Head of Global Rate Strategy at TD Securities, said: “That’s the big picture.”
Wall Street isn’t the only place that’s getting more and more moody. Preliminary data from the University of Michigan survey, and expectations for higher unemployment in the New York Federated Bank survey, have lowered consumer confidence to record lows. I picked it up..
Inflation FAQ
What is inflation? Inflation is the loss of purchasing power over time. So tomorrow the dollar won’t fall as much as it does today. This is usually expressed as an annual change in the prices of daily necessities and services such as food, furniture, apparel, transportation and toys.
Powell may not say that the Fed is also increasing uncertainty about its potential to calm the economy. Predictions from the central bank’s top executives that the economy is heading into a tough time can be a self-fulfilling prophecy that may already shatter fragile confidence.
“They have changed from soft to soft. I don’t think there is another term that can be used to say’not a complete disaster’,” Misra said. “I think the market is calling bluffs. They won’t be able to achieve that.”
The recession will cause problems for the White House. President Biden has the ability to do what he thinks is needed to curb inflation, even when the Fed is independent, his approval rate is declining, and the economy is heading into a potentially tough transition. Emphasizes respect.
“The Federal Reserve has a major responsibility for controlling inflation,” Biden wrote. In the recent opinion section.. He added, “Presidents of the past have tried to improperly influence that decision during periods of rising inflation. I don’t do this.”
Still, some argue that the central bank should not be the only town game when it comes to controlling inflation, given the pain of policy. Skanda Amarnath, Managing Director of Employment Advocacy Group Hire AmericaThe White House argued that more aggressive action should be taken to improve gas supply, for example, in an attempt to offset inflationary pressures.
He argued that trying to stop them by curbing demand, which the Fed could do, would be too costly.
“If you’re going to rely solely on the Fed to solve this problem, the outlook isn’t good,” he said.
However, most mainstream economists see the Fed as a major solution to inflation, as Paul Volcker led the Fed in the 1980s. He raised interest rates to penalties and recession-inducing levels in order to reduce prices that rose in the 1970s. As a result, many are expecting a big move on Wednesday.
Grant Thornton’s Chief Economist, Dyan Swonk, said the three-quarters move “will underscore their commitment to avoiding the mistakes of the 1970s.” “They are now trying to lower inflation and curb it in a more inflationary world.”