Washington (AP) – The US Federal Reserve continues its aggressive fight against runaway inflation with another significant rate hike. For the second time in a row the Fed raised interest rates by 0.75 percentage points on Wednesday. Fed chairman Jerome Powell suggested more hikes of this size.
At the same time, fears of a worsening economic situation are growing in the world’s largest economy. “I don’t think the United States is in a recession right now,” said Powell. But slightly slower growth is needed. The question is whether this balancing success will be successful.
GDP estimate in preparation
The new estimate of gross domestic product (GDP) for the second quarter is already eagerly awaited next Thursday. The US economy contracted unexpectedly in the winter. There are many indications that economic output is falling again. If the economy contracts for two consecutive quarters compared to the previous quarter, economists are talking about a “technical recession.” Powell warned that new data on economic growth should be treated with caution. In his opinion, a recession is not inevitable.
The White House is also trying not to overestimate the upcoming estimates. There are many factors to consider, emphasized US President Joe Biden’s spokeswoman Karine Jean-Pierre. She referred to a strong labor market. The unemployment rate in the US is now at a similar low level as it was before the krone pandemic in February 2020. Biden likes to brag about the figures – while his approval ratings suffer from high consumer prices.
US inflation rate of 9.1 percent
“It wasn’t the president who caused the inflation. There are also external factors that have led us to where we are today “- emphasized Jean-Pierre, incl. with high energy prices and supply chain problems due to the corona lock in China in mind. The US inflation rate of 9.1 percent is the highest in about four decades. This is far from the 2 percent the Fed has set as a target. Hence, central bankers are now advocating a tight monetary policy – and in this way they can dampen the recovery even further.
The current rate hike is the fourth one this year. In June, the Fed raised interest rates by 0.75 percentage points. It was the largest rate hike since 1994, ie in almost 30 years. Along with significant rate hikes in rapid succession, the Fed sets a pace in the fight against inflation that has not been seen in decades. It is not without risk. Central bank increases in key interest rates make loans more expensive and slow down demand. This helps to lower inflation, but also weakens economic growth, because, for example, loans become more expensive.
The Fed must lower inflation and maintain the labor market
“Not doing it now will only increase the cost of dealing with it later,” warned Powell, referring to inflation. “We don’t want a recession and we don’t think we need to have one. We believe there is a way to lower inflation while maintaining a strong labor market. “
But it probably won’t be without pain. Smaller companies in particular can suffer from higher interest rates. They have lower cash flow and are more dependent on expensive loans. On the other hand, Powell said the stock markets were relieved. Some of Powell’s comments encouraged investors despite high interest rates – for example, the Fed president emphasized that he should rethink the situation from meeting to meeting. Some players in the financial markets apparently saw this as a slight easing of the previously hawkish rhetoric of the Fed. The next decision is to be made in September.