Matthew Rusling
THE US Federal Reserve has announced the biggest rate hike in 28 years, and some economists fear a recession lies ahead for the country.
The Fed raised the target for the fed funds rate by three-quarters of a percentage point on Wednesday, in an effort to tamp down the worst inflation in 40 years.
The rate increase was the biggest since 1994, and was implemented after data showed the central bank has failed in its efforts to fight inflation.
The Fed is engaged in a high-stakes but delicate balancing act – it must raise rates high enough to curb painful inflation. But the central bank must not act too aggressively, so the rate hikes do not trigger a recession.
“We believe that a recession in 2023 is now likely,” Sam Bullard, senior economist at Wells Fargo, a major US bank, told Xinhua.
Wells Fargo is changing its base case forecast for next year from an economic soft landing to a mild recession starting in mid-2023, according to a report from the bank that came out Wednesday.
Recent data suggest that inflation is becoming “increasingly entrenched in the economy. High inflation is eroding real income, which likely will weigh on consumer spending growth in coming quarters,” the report said.
The recession will be more or less equivalent in magnitude and duration to the downturn of 1990-1991. That recession lasted for two quarters with a peak-to-trough decline in real GDP of 1,4 percent, the report said.
Recession next year is not necessarily assured, but prospects of a soft landing are “looking increasingly less credible, and we now judge that recession next year is more likely than not,” the report said.
Desmond Lachman, resident fellow at the American Enterprise Institute and a former official at the International Monetary Fund, told Xinhua that in his opinion the Fed was “way too slow” in raising interest rates.
This came at a time when the US economy was recovering strongly and receiving its largest peacetime budget stimulus on record, Lachman said, referring to last year’s nearly US$2 trillion COVID-19 rescue plan.
Panicked by sky high inflation, the Fed is now stepping on the monetary policy brakes too hard in much the same way as last year it kept its foot on the accelerator too long, Lachman said.
It is doing so now by rising interest rates in 75 basis point steps rather than the more normal 25 basis point steps, Lachman noted.
Brookings Institution Senior Fellow Barry Bosworth told Xinhua he does not think the Fed’s interest rate hike alone will trigger a recession, but there is more to come and the risks of a recession next year have certainly increased.
The Fed’s and President Joe Biden’s economists made a large and serious miscalculation, and policy makers are now struggling to reverse course and catch up to the current situation, Bosworth said.
The inflation rate will recede in the next few quarters, but it will remain well above the 2 percent target this year and into 2023, Bosworth said.
The extreme nature of the recent price increases is partially a reflection of other events, and not just an excess of aggregate stimulus, and there is a risk that the Fed will overreact because the policy shift was late, Bosworth said.
The US economy has been on a roller coaster ride over the last two years, due to COVID-19 lockdowns, the surging price of oil, massive government stimulus, supply chain problems and a host of other issues.
Since the start of the year, equity prices have fallen by around 25 percent, bond prices have declined by more than 20 percent and the cryptocurrency market has lost more than half of its value.
That has involved the evaporation of around US$15 trillion, which could cause consumers to cut back heavily on spending, Lachman said.
One silver lining, however, came as markets rose on Wednesday on news of the rate hike.
That was because investors reacted positively to Fed decisiveness after much uncertainty and a widely held perception that the central bank was behind the curb on inflation.
The Dow Jones Industrial Average rose over 300 points, the NASDAQ grew 270 points and the S&P 500 climbed over 54 points by the end of trading on Wednesday. – Xinhua