The Fed faces many challenges when raising interest rates

“Job Fed The decision to raise the basic interest rate by 0.25% and to raise it 6 more times before the end of this year is the most drastic effort in the past 15 years to curb inflation, which is at the highest level in 40 years. of the sheet The Wall Street Journal Issued on March 17 after the statement of the Fed.

The Fed decided to raise the basic interest rate by 0.25% and will raise it 6 more times before the end of this year. (Artwork – Photo: iStock)

However, according to the article, Fed officials are currently facing three important questions when considering next steps. First, how quickly do they need to raise rates to the estimated neutral level so as not to increase or decrease growth? Second, does that neutral rate rise as rising inflation reduces the real cost of borrowing? Third, is there ever a time when the Fed needs to raise interest rates above the neutral level to deliberately slow down the growth of the economy?

Another article on the newspaper Washington Post said that the FED uses interest rate tools to control the sky-high inflation without causing the economy to fall into recession. The ideal outcome would be what economists call a “light landing”, but this has rarely happened historically.

According to the article, the goal of “Landing softly” is said to have been achieved in the period 1994 – 1995 when the US Federal Reserve under Alan Greenspan raised the basic interest rate to 6% and achieved the target. slows down economic growth but does not eliminate it. However, the result was a huge loss for bond investors and led to the default of Orange County, California. Mexico then had to seek a bailout from the US and the International Monetary Fund (IMF).

So what about this time? Leading economists say the outcome is uncertain. Former Fed Governor Lawrence Lindsey bet the probability of the economy falling into a recession by the end of the year at 50%, which began with the Wall Street crisis when the Fed raised the cost of credit. And former US Treasury Secretary Lawrence Summer said the risk of an economic recession before the 2024 election is 50% certain.

On the same topic, sheet New York Times Whether the economy can withstand an interest rate increase in the context of increasing geopolitical conflicts and epidemics is still an unanswered question.

However, the article quoted James Paulsen, chief strategist at Leuthold Group, an independent securities research firm in Miniapolis, as saying: “Inflation is currently very high and the risk of recession is still high. That’s a lot more than 12 months ago, but there’s a pretty good chance of hitting the target of a gentle landing.”

This is also a view that is widely recognized by the US press among economic experts in this country. Because according to experts, in the hands of the Fed, there are still tools and ways to regulate the economy, although the comments and forecasts of the Fed are often much more positive than in reality.

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