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The Fed ‘walks the wire’ between preventing inflation and recession

The Fed runs the wire between preventing inflation and recession - Photo 1.

An American shopping in a supermarket in Chicago, Illinois, USA – Photo: REUTERS

The problem is that ways to solve one of two problems – high inflation and low growth – often end up making the other even worse. And this means that resolving that may completely depend on circumstances beyond the control of American policymakers, like ending the crisis in Ukraine or finding immediate solutions. immediate supply of oil – very difficult things.

New York State University economist Veronika Dolar told Reuters.

Specifically, lending interest rates applied to banks across the country will increase by half a percentage point, from the current range of 0.25 – 0.5% to the range of 0.75 – 1%. This is the largest increase since 2000. Before that, the FED had a stepping stone when it increased by 0.25 percentage points in March 2022 after nearly 2 years of keeping inflation near zero during the COVID-19 epidemic.

Strong hand control inflationary

What worries analysts is the fact that Fed Chairman Jerome Powell left open the possibility that the same level will continue to be increased in the next two meetings of the Federal Open Market Committee (FOMC) – the policy making body. of the Fed. Although Mr. Powell rejected the possibility of raising 0.75 percentage points in an adjustment, analysts estimate that the next 5 meetings this year will be enough for the Fed to bring interest rates to 2.7% by the end of the year. .

The Fed’s goal is to adjust monetary policy to a “neutral” level, meaning it does not increase or decrease economic activity. Some officials estimate this neutral rate could be between 2-3%, but economists worry that the Fed could go further to bring inflation under control. As of March 2022, annual consumer prices in the US rose 8.5% over 12 months, the highest increase in four decades.

In his message to reassure people, besides announcing that he would not raise interest rates too “drastic”, Mr. Powell also affirmed that the US economy is resilient enough to not fall into a recession while the FED seeks to reduce inflation.

“Inflation is too high right now and we understand how difficult it is. We are urgently reducing it. Some of us have lived through high inflation, but many have not. But it is very annoying… If you’re an economically average person, you may not have much left over and inflation immediately affects spending on groceries, gasoline, energy…”, he Powell explained.

After the Fed’s new move, market indexes in Asia and Europe all increased in the session on May 5, such as Shanghai – Composite (China) up 0.7%, FTSE 100 (UK) up 1, 3%, according to AFP. “This is a sigh of relief from investors,” said Clara Cheong, an analyst at JP Morgan Asset Management.

The Fed runs the wire between preventing inflation and recession - Photo 3.

Source: Federal reserve, The Balance – Graphics: TUAN ANH

Factors out of control

But an increase in interest rates will affect everything from mortgages and credit cards to consumer loans, thereby reducing the incentive to spend and do business. According to analyst Rodney Ramcharan of the University of Southern California, rising interest rates will make consumers hesitate to spend and reduce investment. “This is the economic price to pay when the Fed raises interest rates,” Ramcharan told Reuters.

Some economists fear the rate hike will push the US into a recession in 2023, or worse, stagnant inflation, a combination of persistent inflation and high unemployment and a shrinking economy. With the complicated epidemic situation in China and the war in Ukraine, analysts also believe that factors beyond the control of the Fed could undermine this goal and push the US economy into recession.

In his statement on May 4, Mr. Powell believed that the Fed could make a “soft landing”, bringing inflation back to 2%. However, experts Alex Domash and Lawrence Summers of the Harvard Kennedy School say that history suggests this is not so optimistic. Thinking that the Fed’s move seems to be too late, these two experts said: “We find that every time the Fed “smashes the brakes” to meaningfully reduce inflation, the economy has already fallen into a recession. “.

In the post-COVID-19 recovery period, with inflation expected to be short-lived, the Fed seems to prioritize job development and economic stability before starting to raise interest rates in March 2022.

However, US Treasury Secretary Janet Yellen said that the FED could steer the US economy to a “soft landing” and develop stably next year. “The Fed will need ingenuity and luck, but I believe it is possible to combine the two,” Janet Yellen told the Wall Street Journal on May 4, hours before the Fed announced interest rates. new capacity.

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