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

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The monetary committee of the powerful Federal Reserve (Fed) should indeed announce a new sharp increase in key rates.

The Monetary Policy Committee (FOMC) meeting, which started on Tuesday, resumed on Wednesdayh as planned”,”text”:”at 09h as planned”}}”>at 9 a.m. as scheduleda spokesman for the Federal Reserve told AFP.

The decision will be announced at 2 p.m. in a statement, which will be followed by a press conference by Fed Chairman Jerome Powell at 2:30 p.m.

basis points, […] engaging in the most aggressive tightening cycle in years1980″,”text”:”We expect the Fed to raise [ses taux] 75 basis points, […] in the most aggressive tightening cycle since the 1980s”}}”>We expect the Fed to raise [ses taux] 75 basis points, […] engaging in the most aggressive tightening cycle since the 1980sbelieves Gregory Daco, chief economist of EY-Parthenon.

This is what it had already done at its previous meeting in mid-June, bringing rates to a range of 1.50 to 1.75%. It was then the largest increase since 1994. This time, an even bigger increase, of one point, could even be on the table.

The objective: to make credit more expensive in order to slow down consumption and, ultimately, ease the pressure on prices. Inflation indeed again reached a new record in June, at 9.1% over one year, unheard of for more than 40 years in the world’s largest economy.

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Consumption is the engine of the US economy, accounting for nearly three-quarters of GDP.

Jerome Powell at a press conference.

Jerome Powell, Chairman of the US Federal Reserve

Photo: Reuters/Elizabeth Frantz

Improvement expected in September

The comments that Jerome Powell will be able to make on the rate of increases envisaged by the institution for the coming months will also be scrutinized and dissected by observers.

Powell will repeat that the Fed sees inflation as a scourge, especially for low-income households, and that policymakers are determined to bring it down”,”text”:”Mr.Powell will repeat that the Fed considers the inflation as a scourge, especially for low-income households, and that policymakers are determined to bring it down”}}”>Powell will repeat that the Fed sees inflation as a scourge, especially for low-income households, and that policymakers are determined to bring it downanticipates the economist Ian Shepherdson, of Pantheon Macroeconomics.

The Fed has indicated that it would take a drop in inflation for it to consider stopping raising rates, or at least slowing the pace of hikes. We expect this condition to be met by the time of the September meeting.adds Ian Shepherdson.

But the long-awaited economic slowdown to bring prices down could prove too strong, and plunge the world’s largest economy into recession.

Recession highly likely, says IMF

The European Central Bank (ECB) has also started to tighten its monetary policy, thus following many financial authorities. And the International Monetary Fund (IMF) said on Tuesday that it was essential that these institutions continue to fight against inflation.

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Of course, this will not be done without difficulty and tighter monetary policy will inevitably have economic costs, but any delay will only exacerbate themaccording to IMF. The Fed hopes to achieve a soft landing.

The good health of the American economy should allow it to escape a recession, according to Joe Biden’s Minister of Economy and Finance, Janet Yellen.

The IMF is less optimistic. The current environment suggests that the possibility of the United States escaping recession is slimits chief economist, Pierre-Olivier Gourinchas, warned on Tuesday.

The international institution now expects only 2.3% growth in the United States for this year, or 1.4 points less than in its latest forecasts, published in April.

Second-quarter gross domestic product (GDP) growth will be released on Thursday. It should have been very slightly positive, after a negative first quarter (-1.6%), thus saving the American economy from recession for this time.

In the event that it were negative again, the world’s largest economy would then enter a technical recession, with two negative quarters in a row.

The very definition of recession, however, is debated in the country as this publication approaches: is it two consecutive quarters of negative growth? Or a broader deterioration in economic indicators, which is not currently the case?

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