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Why the Fed Is Risking a Recession

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Concerns about a recession are rising as the Federal Reserve embarks on an aggressive campaign to raise interest rates, and politicians and the general public are wondering why central banks are planning to cause economic distress. I am more and more skeptical.

Simply put, this is a tool that the Fed must control inflation.

Central banks are trying to slow down price increases. It does it by raising interest rates, which makes mortgages, car loans and business borrowing more expensive. As money becomes more expensive, it puts pressure on spending and employment, weakening the employment market and the broader economy — perhaps especially noticeable. Slow growth gives supply the opportunity to keep up with demand.

The adjustment process is already unpleasant: stock prices are falling, home sales are Began to be late The unemployment rate can rise. But the Fed has one way to bring inflation back in line. It’s a blow until households and businesses stop spending heavily. Central banks acknowledge that a recession is a real risk, as the transition can be bumpy.

“Monetary policy is a well-known dull tool,” Federal Reserve Chair Jerome H. Powell said in a testimony in front of Senator Wednesday. “There is a risk that weaker results are certainly possible, but they are not our intention.”

At the same time, they say that not trying to cool inflation, that is, allowing inflation to continue to ratchet and settle higher, will be a bigger problem.

“This is very high inflation, which is hurting everyone,” Powell said.

The Federal Reserve has argued that it could slow the economy enough to mitigate inflation without suffocating demand enough to plunge the United States into recession.Central banker Last week forecast They will boost unemployment slightly this year and next, but not sharply.

However, its gentle landing is not certain. As shocks continue to shake the economy — the Ukrainian war pushes up food and fuel costs, China’s blockade to contain pandemics slows factory production, and ship roars prolong — it further slows demand for central banks To match the supply of limited goods and services that meant that you might have to.

“That’s certainly possible. It’s not our intention,” Powell said of the recession. “Certainly, the events of the past few months around the world have made it more difficult to achieve what we want: 2% inflation and a still strong labor market.”

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