‘Recession’ mixed prospects. Will the Fed’s ‘God’s hand’ come out?

Recession – As the US inflation rate hits a 41-year high, the prospect of the Federal Reserve (Fed) stepping on the pedal to accelerate the rate hike. The market’s attention is focused on how far the Fed’s tightening moves will push the economy back. The Federal Reserve’s sense of balance between inflation and growth is urgently needed amid mixed analysts’ forecasts for a recession, the Financial Times (FT) and CNN reported on the 12th (local time).

The Fed faces a dilemma ahead of the Federal Open Market Committee (FOMC) meeting on the 14th-15th. As the US Consumer Price Index (CPI) rose 8.6% year-on-year in May, the Fed is expected to take another ‘big step’ (0.5 percentage point increase at a time) following March. It is the first time since 1994 that the Fed has raised its key interest rate by 0.5 percentage point twice in a row. Some are not ruling out the possibility of a ‘giant step’ that raises 0.75 percentage points.

The problem is that a steep rate hike could fuel a US recession. Former U.S. Treasury Secretary Larry Summers said in an interview with CNN that the Fed’s forecasts tend to be “too optimistic” and that “the risk of a recession next year is clear.”

Earlier, US Treasury Secretary Janet Yellen raised an objection to the statement that there were no signs of a recession because consumption and investment were robust.

According to a survey conducted by the FT in conjunction with the University of Chicago’s Booth Graduate School of Business on 49 eminent economists from the 6th to the 9th of this month, about 70% of the respondents predicted that the US economy would start next year. Federal Reserve Chairman Jerome Powell acknowledged that inflationary measures could raise the unemployment rate slightly, but said it would be close to a soft landing. However, experts pointed out that the current price level is very serious and it is difficult to avoid the aftermath of the Fed’s sudden break.

On the other hand, former Fed Chairman Ben Bernanke said that a soft landing for the US economy is possible. “The current economic situation in the United States is very different from that of the 1970s,” he said. “If the supply factors that stimulate inflation improve, there will be an opportunity for the Fed to achieve a soft landing,” he said.

The Peterson Institute for International Economics advises that the Fed should set a new inflation target of 3% from the current 2%. Rather than causing an economic recession by forcibly tightening to meet the target, it is to allow room for monetary policy operation.