The Fed will strike hard to pull the US economy out of deflation

Faced with rising prices in the United States, the American central bank should try to slow the economy and curb inflation on Wednesday, while taking precautions to protect the economy from a threatened recession.

The powerful Federal Reserve’s (Fed) monetary committee, which meets on Tuesday and Wednesday mornings, should indeed announce a new sharp increase in key rates.

The decision will be announced in a statement at 2pm (6pm GMT), followed by Fed Chairman Jerome Powell holding a press conference at 2:30pm.

“We expect the Fed to raise (its rates) by 75 basis points, (…) conducting the most aggressive tightening cycle since the 1980s,” said Gregory Dako, chief economist at EY-Parthenon.

This was already the case at its previous meeting in mid-June and was the biggest increase since 1994. An increase larger than one point may also be on the table.

The goal: to make credit more expensive to reduce consumption and ultimately put downward pressure on prices. Inflation hit a new record again in June, at 9.1% in a year, unheard of in more than 40 years.

Jerome Powell’s comments on the company’s expected growth rate in the coming months will also be scrutinized and dissected by observers.

“Powell reiterates that Mr. Fed sees inflation as a scourge, especially for low-income families, and that policymakers are determined to reduce it,” said economist Ian Shepherdson of Pantheon Macroeconomics.

The Fed has signaled that inflation will fall to stop or at least slow down rate hikes. “We hope to have this situation in place by the September meeting,” adds Ian Shepherdson.

But the long-awaited economic slowdown is too strong to drive down prices and could push the world’s largest economy into recession.

The European Central Bank has also started to tighten its monetary policy, following a number of financial authorities. The International Monetary Fund said on Tuesday that it is essential that these institutions continue to fight inflation.

According to the IMF, this will certainly not be without difficulty and “tight monetary policy will inevitably have fiscal costs, but any delay will exacerbate them”.

The Fed hopes to achieve a “soft landing.”

According to Joe Biden and Treasury Secretary Janet Yellen, the good health of the American economy should allow it to avoid a recession.

The IMF is less optimistic. “The current climate suggests that the United States has little chance of escaping recession,” its chief economist Pierre-Olivier Gaurinchas warned on Tuesday.

The international firm now expects growth in the United States for this year to be just 2.3%, or 1.4 points lower than its latest forecast published in April.

The second quarter gross domestic product growth rate will be released on Thursday. After a negative first quarter (-1.6%) it should be very marginally positive, thus protecting the American economy from recession this time around.

But, in the event that it turns negative again, the world’s largest economy will enter a technical recession with two negative quarters in a row.

The definition of a recession, however, is the subject of debate in the country as this publication approaches: Is it two consecutive quarters of negative growth? Or is there a broader decline in economic indicators that is not present?