The specter of a recession hangs over the United States, an evil that will inevitably save the world’s largest economy from inflation. This assumption is gaining momentum after the central bank’s historic decision to raise its core rates drastically.
The chances of a recession in 2023 are rising as it may need to control inflationunderline Joseph Gagnon, economist at the Peterson Institute for International Economics, and former Federal Reserve (Fed) economist, in a note.
The US economy slowed with a 1.5% contraction in GDP in the first quarter. The start of the second quarter seems to indicate that the slowdown is continuing in some sectors such as manufacturing, real estate and retail sales. Major ailments require good remedies: in the face of continued rising prices, the economy must slow down, as demand from American consumers remains strong and supply is insufficient.
Purchasing power must match supplyexplained inAFP Steve Englander, head of U.S. macroeconomics for Standard Chartered, and former economist at the U.S. central bank.
Reduce consumption
And that is exactly the job of the Fed. By raising its core rates, it encourages commercial banks to offer more expensive loans to individuals and businesses. They are, as a result, less inclined to consume. When inflation broke, in May, a new record in 40 years (8.5% in one year), the institution therefore went on, on Wednesday, with the largest increase in its core rates since 1994: it raised these three quarters of a percentage point, to bring them in the range of 1.50 to 1.75%. This third increase will be followed by another strong increase by the end of the year.
Let it be clear, we are not trying to induce a recession.however the Fed chairman, Jerome Powell, confirmed. We are trying to lower inflation to 2%, [et conserver] a strong labor market.
The Fed is now banking on 5.2% inflation this year, when it still expected 4.3% at its meeting in March. At the same time, growth is expected of only 1.7%, compared to 2.8% previously.
The risk of recession is rising, and strong, believes Steve Englander who, however, thinks this situation should be avoided. However, thesoft landing which Jerome Powell promised a few weeks ago now seems very hard to achieve.
The prospects for a soft landing seem less credible, and now we judge a recession next year more likely than not., warns Jay Bryson, economist for Wells Fargo. In fact, he explained, inflation enters […]declines in real income, which is likely to weigh on the growth of consumer spending in the coming quarters.
Avoid high inflation
In addition, the sharp rise of the Fed rate reduce interest rate sensitive spending, i.e., purchases made on credit. Many of these are in the United States. The reputable and powerful US Federal Reserve, however, is willing to take that risk to avoid high inflation. does not continue for many yearssaid Kathy Bostjancic, chief economist for Oxford Economics.
Ideally, the American economy should follow a trajectory, called “Goldilocks”, named after the children’s story, he explained to AFP. In other words, an economy that cools right, at the right temperature, like the bowl of soup of the little bear swallowed by the girl in the story.
The consumption turmoil the country has experienced for nearly two years, especially with huge financial assistance paid by the government, has faced a production that is insufficient to meet demand due to global supply difficulties that have persisted since the beginning. of the crisis in COVID-19.
As a result, the price went up. And the war in Ukraine added an extra layer. Rising oil prices, in a country where cars are often valuable and fuel -intensive, are weighing heavily on households, as well as rising food prices.
France Media Agency
Source: Radio-Canada
