On Wednesday, the US Federal Reserve raised the interest rate for the third consecutive time. While many think it’s the right decision, a recession could probably be looming.
Despite yesterday’s hike in the Dollar value, which saw its highest level since 2002, the Federal Reserve went ahead and announced another rise in interest rate. The reason the Dollar spiked so much on Wednesday (at least 0.5%) was because of Putin’s call to arms of 300.000 new conscripts, de facto announcing the onset of a long war. Therefore, investors and common people found safe haven in what keeps being the strongest pillar of the global economy: the US Dollar.
This however hasn’t changed the bleak reality of the situation: inflation is at historical levels, reaching over 9%. Such a level had not been seen since 1982, and it worries economists from all over the globe. So, the Federal Reserve of the United States kept hitting the brakes on the economy yesterday, raising the interest rate by 0.75%.
This is the third consecutive move of this scale. So far this year, the interest rate has been brought up to 3% - 3.25%, a move that has herself little to no historical precedents. The last time the interest rate experienced such a hike was in 1994, and it was brought down after a few months.
This time, however, the Fed is not going to stop soon.
When is inflation going to stop
The current inflation was, to some degree, expected. It is the result of several stimulus packages severely needed by the population after the Covid-19 pandemic. What went wrong were basically two things: the pandemic wasn’t over yet and Putin invaded Ukraine. The former meant that all the money poured into the economy could not be spent and invested yet, while the latter resolved into an utter imbalance in world’s exports (especially of oil and gas).
Thus, the “temporary” inflation became very much “permanent”. Now, the Federal Reserve hopes to bring it down to 2% by 2025, but this means a steady rise in interest rate. Indeed, by the words of Jerome Powell himself, the end goal is an interest rate of 4.6% in 2023.
A rise in interest rate, however, implies slowing down the economy. US projected GDP growth in 2022 is 0.2%, significantly lower of the 1.7% originally expected. For the second quarter in a row GDP shrank, which usually means going towards a recession.
"It’s going to get progressively harder for us to avoid a recession. A recession very well might be in the cards by late 2023 or into 2024. It’s going to depend on how much the Federal Reserve has to push.", said director of Moody’s Chris Lafakis.
The Fed has her hands tied: a recession is the price to pay for this inflation. The question is, as always, who’s going to pay this price?
