The US Federal Reserve made no surprise on its June policy meeting and raised interest rates by 0.75%, in the biggest interest rate increase in nearly thirty years, after the expectations sharply shifted towards more hawkish action following the release of May’s inflation data, last week.
The prices continued to rise despite wide expectations that recent Fed rate hikes would cause inflation to peak and start to ease inflationary pressures, though the latest report showed inflation rose to the highest in more than four decades, with signs that it could rise further and enter the double-digit values.
Inflation rose to 8.6% in May, the highest since early 1992, with the value reflecting the current formula of calculating, but if it was calculated the way it was done back in 1992, the level of inflation would have been over 15%.
Economists remain worried as the action of the central bank, which now increased the pace in tightening its monetary policy to curb the worst inflation in more than 40 years, so far does not give results.
Additional negative signals coming from the central bank’s downgrade of the economic outlook, expecting growth to slow below the expected 1.7% rate in 2022 which divides analysts in views of the performance of the US economy.
The US central bank is expected to deliver another 0.75% rate increase in the next meeting in July, but Fed Chair Jerome Powell said such moves would not be common, however, all possible scenarios will remain on the table.
Some expect a scenario of the economy’s hard landing as rate hikes will not give expected results in putting inflation under control but would slow growth and push the economy into recession, while others expect that the central bank’s actions will dampen inflation, although the growth will again slow, it would lead to a so-called soft landing.
Powell expressed optimism regarding the central bank’s decision to raise rates in a more aggressive manner, expecting that this will ease recession risks and that the economy would emerge unharmed from the Fed’s action which represents the sharpest policy tightening since 1994, although the expectations that the economy will slide into recession, currently stand at the level above 50%.
This suggests that the US central bank, despite its current confidence, will have to strongly count on the recession scenario, meaning that the policymakers will face strong signals of reversing its action and probably bring rate cuts on their agenda in mid-2023 in case of rising recession risks.
The Fed is in a very difficult situation as it has been strongly criticized for mishandling the monetary policy tools and being late in attempts to curb inflation, with many analysts accusing the central bank of reacting too slowly and delaying, according to them, more appropriate steps, in taming inflation, once they had strong signals it may get unleashed and cause much bigger damage to the economy that we see now.
The US policymakers are expected to remain very cautious, as soaring inflation so far does not show signs of peaking that would prompt the Fed for more aggressive steps in the near future, despite a slightly calmer tone from chair Powell, with inflation reports in coming months to be the main drivers of Fed’s action.