Towards a sharp fourth hike in Fed interest rates this week

Towards a sharp fourth hike in Fed interest rates this week

The US central bank, the Fed, still hopes to be able to curb inflation without triggering a recession. It should carry out a fourth strong hike in its reference rates on Wednesday, but finding the right balance will be a high-flying exercise.

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“They want to try to achieve what they call a ‘soft landing,’ trying to avoid a recession,” Julie Smith, an economics professor at Lafayette University in Eaton, Pennsylvania, told AFP.

“The question is, can they do it? This is a difficult question to answer at this stage,” she added.

The Fed monetary committee will meet on Tuesday and Wednesday, and will raise rates again. These are currently in a range of 1.50 to 1.75%.

However, the institution must ensure that this voluntary slowdown in economic activity is not too strong, so as not to weigh down, in particular, the labor market.

“I believe that a slight recession”, with unemployment above 3.7% forecast by the Fed for 2022, “will be necessary to break this inflationary spiral”, however, former Fed Vice President Donald Kohn anticipates, in an interview with AFP .

“But the uncertainty is so great,” he added.

What increase?

The hypothesis of a rise of three quarters of a point (75 basis points), as in the last meeting, in mid-June, seems to be unanimous. It was then the strongest increase since 1994.

“I think they will raise rates by 75 basis points. But the Fed can always surprise us”, however, Julie Smith anticipates.

One of the institution’s governors, Christopher Waller, recently opened the door to a one-point increase (100 basis points), something unheard of since the 1980s, when former Fed Chairman Paul Volcker was struggling with inflation of two digits.

Members of the monetary committee “will probably discuss” this hypothesis, according to Julie Smith, “simply because the inflation numbers continue to be very bad in the United States.”

However, he believes, “the other signs … indicate that previous rate increases have probably started to work, at least to curb demand (in) the housing market.”

The real estate market, in fact, has slowed down considerably due to exorbitant property prices and rising interest rates.

But employees always have many options among the thousands of job offers that they do not find interested. And consumption is maintained, although the amount of sales is inflated by inflation.

“Room for maneuver”

“Recent economic data supports a 75 basis point rate hike, although a 100 basis point rate hike could be considered,” Kathy Bostjancic, chief economist at Oxford Economics, said in a note.

The health of the labor market and consumption offer the Fed “the necessary room to maneuver to continue raising the key rate rapidly,” he said.

And the chances of a successful “soft landing” are reduced “as the probability of recession increases,” the economist warns again.

Achieving this will require “skill and luck,” Treasury Secretary Janet Yellen recently noted, but believes the US economy is healthy enough to escape recession.

Given the prices of food, housing or cars, which continue to rise in the United States, the Fed, since March, has been gradually raising its reference rates.

Although inflation accelerated even more in June, reaching 9.1% at one year (IPC index), this is aimed at making credit more expensive for families and companies, in order to curb consumption and, ultimately, relieve pressure on prices.

Also on the other side of the Atlantic, inflation pushed the European Central Bank (ECB) on Thursday to raise its interest rates for the first time in more than ten years, even surprising for a faster than expected movement, with a rise of half and end the era of negative rates.


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