Is Recession the Only Remedy for US Inflation?

He chaired Jerome Powell after a press conference in Washington on June 15, 2022.
After a press conference in Washington on June 15, 2022, he chaired Jerome Powell (Olivier DOULIERY / AFP).

The ghost of recession depends on the United States. This could prove to be an inevitable evil to save the world’s largest economy from inflation. This assumption is gaining momentum after the central bank has made a historic decision to raise key interest rates significantly.

“The possibility of a recession in 2023 increases because inflation may need to be curbed,” said Joseph Ganyon, an economist at the Peterson Institute for International Economics (PIIE) and a former Fed economist. rice field.

The US economy is already slowing, with GDP shrinking 1.5% in the first quarter. The beginning of the second quarter seems to indicate a continuing slowdown in certain sectors such as manufacturing, real estate and retail sales.

Fed raises key interest rates
Fed raises key interest rates (Patricio ARANA / AFP)

Big illnesses need big remedies. As prices continue to rise, demand from American consumers remains strong and supply is inadequate, so the economy must slow down.

“Purchasing power must match supply,” Steve English, head of Standard Chartered Bank’s US macroeconomics and former economist at the Central Bank of the United States (FRB), told AFP.

And that’s exactly the Fed’s job. By raising the key rate, we encourage commercial banks to offer large loans to individuals and businesses.

– Soft landing pulls apart –

Inflation set a new 40-year record in May (8.5% in a year), and on Wednesday the agency went on to rise to the highest key rate since 1994. Points, to bring them in the range 1.50 to 1.75%.

Following this third increase, other strong increases are expected by the end of the year.

“Let’s be clear. We are not trying to cause a recession,” said Fed Chair Jerome Powell, “trying to bring inflation back to 2% and maintain a strong labor market.” I have. “

Customers are waiting to order a $ 1.50 menu on June 14, 2022 in Hawthorne, California.
Customers are waiting to order a $ 1.50 menu in Hawthorne, CA on June 14, 2022 (Patrick T. FALLON / AFP).

The Fed had expected 4.3% at its March meeting, but expects inflation of 5.2% this year. At the same time, it forecasts only 1.7% growth compared to the previous 2.8%.

“The risk of a recession is skyrocketing,” said Steve English, but he believes this scenario should be avoided.

But the “soft landing” that Jerome Powell promised a few weeks ago now seems very difficult to achieve.

Wells Fargo economist Jay Bryson warns, “The outlook for soft landings seems to be increasingly unreliable, and we believe that next year’s recession is unlikely.” is doing.

Indeed, he explains, “inflation has been set at (…) and is eroding real income, which will probably weigh on consumer spending growth in the coming quarters.”

In addition, the Fed’s sharp rate hike “will eventually reduce interest rate-sensitive spending, credit purchases.” Many are in the United States.

– “Goldilocks” economy –

But the powerful and venerable Federal Reserve is willing to take that risk to prevent high inflation, said Cathy Bossjanchitch, chief economist at Oxford Economics.

Inflation in the United States
Inflation in the United States (Eléonore HUGHES / AFP)

Ideally, the American economy should follow a trajectory known as “Goldilocks,” named after the story of a child, she explains to AFP. In other words, an economy that cools properly at the right temperature, like a bowl of little bear soup that a girl swallows in the story.

Consumer enthusiasm, which the country has experienced for nearly two years, especially thanks to generous government funding, has faced production struggles due to global supply difficulties that have continued since the beginning of the Covid-19 crisis. I did.

As a result, prices have skyrocketed.

And the war in Ukraine added an extra layer. Soaring oil prices are putting a heavy burden on households as well as rising food prices in countries where automobiles are essential and often consume large amounts of fuel.

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