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The Federal Reserve prepares another interest rate hike. Will there be a recession?


Experts see the Fed as likely to raise its short-term benchmark rate by 75 points after inflation soared to 8.6% in May, a 40-year high.

By Christopher Rugaber

Associated Press

The Federal Reserve (Fed) will announce this Wednesday its biggest rise in interest rates since 1994, a higher hike than it had previously indicated and a sign that it is trying with all the tools at its disposal to contain runaway inflation.

This decision raises fears of a recession and comes after inflation shot up in May to 8.6%, the highest level in the last 40 years.

This fear of a more aggressive action by the Federal Reserve has plunged the stock markets, leading the Standard & Poor's 500 and Dow Jones indices to enter a bear market (known as the

bear market

, which occurs after an accumulated fall of more than 20% since the previous maximum).

A broker reacts to the bad day of the stock market on June 13. Eduardo Munoz Alvarez / AP

Experts consider it likely that the Federal Reserve will raise its short-term reference interest rate by 75 percentage points (when the usual increase is 25 points), until it reaches a range of 1.5% to 1.75%.

It's also likely to signal further hikes through the end of the year, which will increase borrowing costs for consumers and businesses, cause an economic slowdown, and may trigger a recession (technically, when the economy shrinks for two consecutive quarters).

The Fed's previous rate hikes have already raised the cost of home loans by about two percentage points since the year began, and dampened home sales.

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Experts also expect the European Central Bank (ECB) to raise rates by a quarter point in July, its first hike in 11 years.

In addition, in September it could announce a larger increase if the record levels of inflation are maintained.

Global efforts are increasing the risk of a serious recession in the United States, Europe and other countries.

Last week, the World Bank warned of the threat of stagflation, which is slow growth accompanied by high inflation.

By the end of 2022, the Federal Reserve will have raised its key interest rate to a range of 3.25% to 3.5%, some economists estimate, higher than forecast a few weeks ago.

At that level, the rate would probably be well above the neutral level, which would aim to curb growth.

In March, the Fed had forecast that it would only raise rates to a range of 1.75% to 2% by the end of the year.

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After the last meeting of the Fed in May, in which it raised its reference rate by half a point, its president, Jerome Powell, put similar hikes on the table at the June and July meetings in case the economy "evolves in line with expectations.

But on Friday the government reported that year-on-year inflation unexpectedly accelerated in May to 8.6%, the highest level in four decades.

Inflation has spread to almost every sector of the economy, with rising costs for rent, gasoline, clothing, health care and airline tickets.

Also on Friday, a survey of consumer sentiment by the University of Michigan found that public concern about inflation is rising.

This is an alarming signal for the Fed, because expectations can be self-fulfilling: if people expect higher inflation in the future, they often change their behavior in ways that push prices up.

For example, they can increase large purchases before they become more expensive.

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The accelerated series of rate hikes now expected from the Fed will increase the likelihood of a recession in the coming year.

"I think we're past the point where a soft landing is plausible," said Aneta Markowska, chief economist at investment bank Jeffries, referring to the Fed's effort to raise rates enough to dampen growth but not enough. enough to cause a recession.

"I think they are going to have to cause a contraction," he added.

A key reason a recession is now more likely is that economists increasingly believe that for the Fed to rein in inflation to its 2% target, it will have to slash consumer spending, wage earnings and economic growth.

Ultimately, the jobless rate will almost certainly have to rise, something the Fed hasn't forecast yet, but could in updated economic projections to release on Wednesday.

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"When you're going down the highway at 90 miles per hour and you miss the exit, slowing down isn't going to help you. You have to make a U-turn and come back," Markowska said by way of comparison.

Source: telemundo

All news articles on 2022-06-15

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