Why the Risk of Recession Remains High After the Fed’s Policy Tightening

La US Federal Reserve did not surprise its June policy meeting and raised interest rates by 0.75%, in the largest interest rate hike in nearly thirty years, after expectations sharply shifted to tougher action following the release of the May inflation data last week.

Prices have continued to rise despite broad expectations that recent Fed rates will cause inflation to peak and begin easing inflationary pressures, although the latest report showed that inflation has risen to its highest in more than four decades, with signs that it could rise and enter. the two-digit values.

Inflation rose to 8.6% in May, the highest since early 1992, with the value reflecting the current formula of calculation, but if it had been calculated as it was done back in 1992, the level of inflation would have been more than 15%.

Economists remain concerned that the performance of the central bank, which has now increased the pace of tightening its monetary policy to curb the worst inflation in more than 40 years, has so far yielded no results.

Further negative signals coming from the central bank’s declining economic outlook, expecting growth to slow below the expected 1.7% rate in 2022, which divides analysts’ views on the performance of the US economy.

The U.S. central bank expects to deliver another 0.75% rate hike at its next meeting in July, but Fed Chairman Jerome Powell said such moves would not be common, yet all possible scenarios would remain on the table.

Some expect a scenario of a hard landing of the economy, as tariffs will not yield expected results to control inflation, but will slow growth and push the economy into recession, while others expect central bank actions to weaken inflation, though growth will be again. slow, it would lead to a so-called soft landing.

Powell expressed optimism about the central bank’s decision to raise rates more aggressively, hoping that this would ease recessionary risks and that the economy would emerge unscathed from Fed action, which represents the sharpest political strain since 1994. , that the economy. will slide into recession, currently standing at the level above 50%.

This suggests that the US Central Bankdespite its current confidence, it will have to rely heavily on the recession scenario, which means policymakers will face strong signals to reverse its action and are likely to bring tariffs on its agenda by mid-2023 in the event of growing recessionary risks.

The Fed is in a very difficult position, as it has been heavily criticized for mishandling monetary policy tools and delaying attempts to curb inflation, and many analysts accuse the central bank of reacting too slowly and delaying, in their view, more appropriate steps. , in domesticating inflation, once they have had strong signals, it can trigger and cause much greater damage to the economy we see now.

La American policymakers are expected to remain cautious, as soaring inflation so far shows no signs of a peak that would prompt the Fed for more aggressive steps in the near future, despite a slightly calmer tone from Powell’s chair, with inflation reported in coming months to be the main drivers of Fed action.