Aggressive interest rate hikes increase the likelihood of a recession

• Aggressive Federal Reserve interest rate hikes increase the likelihood of a recession.
• Inflation is now at its highest point in four decades.
• The central bank hasn’t risen its interest rate this much in one go since 1994.

Federal Reserve (FED) Chairman Jerome Powell has vowed to do whatever it takes to curb inflation, which is now at its highest point in four decades and, so far, defying the Fed’s efforts to control it. However, it seems that doing so may cause the one painful thing the Fed has tried to avoid: a recession.

A worse-than-expected inflation report for May (consumer prices soared 8.6% from a year earlier, the biggest jump since 1981) helped prompt the Fed to raise its benchmark interest rate by three-quarters of point on Wednesday, June 15, according to the AP.

Experts fear that inflation will lead to a recession

Not since 1994 has the central bank raised its interest rate this much in one go. And until Friday’s nasty inflation report, traders and economists had expected a rate hike of just half a percentage point on Wednesday. In addition, several more hikes are coming.

The “soft landing” that the Fed had hoped to achieve – bringing inflation down to its 2% target without derailing the economy – is turning out to be more complicated and risky than Powell had expected. Filed Under: US recession.

What does the Fed hope to achieve?

Every rate increase means higher borrowing costs for consumers and businesses. And whenever prospective borrowers find loan rates prohibitively expensive, the resulting drop in spending undermines confidence, job growth, and overall economic vigor.

“There is a path for us to get there,” Powell said Wednesday, referring to a soft landing. “It’s not getting easier. It’s getting more challenging.» It’s always been tough. The Fed has failed to engineer a soft landing since the mid-1990s. And Powell’s Fed, which was slow to recognize the depth of the inflation threat, is now trying to catch up with an aggressive series of rate hikes. Filed Under: US recession.

The risk of a recession is probably 50-50

«They’re telling you, ‘We’ll do whatever it takes to get inflation down to 2%,'» said Simona Mocuta, chief economist at State Street Global Advisors. “I hope the (inflation) data won’t require them to do whatever they’re willing to do. There will be a cost.» In Mocuta’s opinion, the risk of a recession now is probably 50-50.

«It’s not like there’s no way you can avoid it,» she said. «But it’s going to be hard to avoid it.» The Fed itself acknowledges that higher rates will inflict some damage, though it doesn’t foresee a recession. On Wednesday, the Fed predicted the economy will grow about 1.7% this year, a sharp downgrade from the 2.8% growth it had forecast in March. And it expects unemployment to average a still-low 3.7% at year’s end. But speaking at a news conference on Wednesday, Powell rejected any notion that the Fed must inevitably cause a recession as the price of reining in inflation. «We’re not trying to induce a recession,» he said. «Let’s be clear about that.» Filed Under: US recession.

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