Bloomberg News reports that it is quite likely that the US economy will have to undergo more pain if the Federal Reserve wants to tame inflation. There is a slowing down of growth as and when the Fed increases the rates. The impact is observed in the unemployment claims as they edge up, as technology companies are curbing recruitment, and the housing market displays softening.
Inflation stays, causing economists to change their forecasts
However, as inflation appears to be staying and is at a four-decade high, many analysts and experts believe that the pressure will not ease unless there is a recession and a higher rate of joblessness. According to a Bloomberg survey comprising economists, this month has put the possibility of a downturn to 47.5% the next year, which was earlier believed to be 30% as was in June.
The Fed Chairman, Jerome Powell, had raised rates the most since 1994. His colleagues are expected to support him in raising another 75 basis points this week. This also signals the likelihood of more to come in the months ahead.
According to Powell, a failure to restore price stability would perhaps be a greater mistake than forcing the US into recession.
Few Fed officials are still hopeful
Few Fed officials continue to believe that a recession can be kept at bay, and a soft landing of the economy could be executed. They have been arguing that there is underlying strength in the economy and have expressed hope that inflation might ease as rapidly as it escalated.
The Fed measures inflation with the help of its favorite gauge, the persona; consumption expenditure price index. It was recorded as 6.3% in May, which is well above the central bank’s target of 2%.
Bloomberg News reports that the central bank is facing a tricky situation. This is because at least part of the upward pressure related to inflation has not come from the excess demand that it can control but from the supply disruptions and that it has no power to impact the same, which is being triggered by the pandemic the Ukraine Russian ongoing conflict.
According to Alan Binder, who is the ex-Fed Vice Chair, monetary policy affects inflation with a gap of long periods of two or three years.
Meanwhile, the traders in the federal fund futures markets have put their bets that the Fed will be raising rates to about 3.5% from 1.5% to 1.75% by the year-end before it can start cutting it in the later part of 2023.
However, there is doubt from Lawrence Summers, the former Treasury Secretary, about whether it will work out that way.
