The Federal Reserve is preparing to escalate its crusade against inflation this week with yet another interest rate hike, gambling with the possibility of furthering a recession at a time when the United States’ economy is putting on the brakes. With inflation accelerating to a surprising 40-year high in June and the job market continuing to rise, the Fed is under increasing pressure to slow demand and plateau surging consumer prices.
However, there are some signs that the economy is beginning to neutralize. The number of Americans filing for unemployment benefits is increasing, companies are announcing layoffs and hiring freezes, and the housing market has been brought down to a simmer.
Gross domestic product slowed in the first quarter of the year by 1.6% and will likely decline a second time in the second quarter of 2022. Federal policymakers are keeping their eyes on the inflation control as higher prices continue, even if doing so will trigger a recession in the American economy.
According to Federal Chairman, Jerome Powell, failing to restore price stability will be a bigger mistake than fatal growth which will inevitably cause an economic downturn. In agreement, senior economist at Allianz Trade North America, Dan North, said “the Fed will continue on its very aggressive path of rate hikes to fight off the inflation, which has been so devastating to American families. But in doing so, the Fed is really slamming the brakes hard on the economy, raising the risk of recession.”
For the first time since 1994, central bank policymakers raised the benchmark interest rate by 75 basis points in June 2022. They also warned that a second increase of such a magnitude will potentially occur this July.
There’s not much relief to be heard yet, as the effects of inflation were even more detrimental than was expected last month. Consumer price index for items such as everyday goods, gasoline, groceries, and rent increased a whopping 9.1% this June in comparison to June 2021. That is the fastest pace of inflation in one calendar year since December 1981.
Due to the depressing inflation reports, the Fed is expected to implement a second three-quarter-point hike after its meeting this week. If such a hike were to occur, it would mark the fourth consecutive hike since March of this year and would put the key rate in a range of 2.25% to 2.5%.
Those rates are the highest since the COVID-19 pandemic began more than two years ago. Because hiking interest rates tend to create higher rates on consumer and business loans, mortgage rates are already approaching 6%, the highest since the 2008 American recession.
Some credit card issuers have also raised their rates to 20%. Despite all of this harrowing news, policymakers have remained confident that they can cool down the growth enough to cut back on inflation without simultaneously dropping our economy into a recession. However, experts are skeptical that the Fed is even capable of achieving such a miraculous outcome. Many factors must be taken into consideration such as the Russian war in Ukraine and the ongoing influence of COVID-19 across the globe. The Fed may be able to control demand, but it does not harness the tools needed to influence supply. As said by chief global strategist at Principal Global Investors, Seema Shah, “Fed policy cannot directly impact food or energy inflation, while rate hikes so far have done little to slowcore CPI components, which are, traditionally, more responsive to monetary policy. As such, the Fed must continue hiking aggressively if it wants to get a handle on the inflation problem, even if it means speeding up a recession problem.”
