The Federal Reserve will announce its latest monetary policy tomorrow, likely raising interest rates again.
Tomorrow, on Wednesday, the American Federal Reserve will announce its latest move on interest rates. It will likely keep raising them, possibly by another quarter of a point. While such a raise is considered inevitable, the Fed’s statement after this announcement will be crucial to understand whether it will be the last hike or not.
The Federal Reserve has been raising interest rates for over a year. Its goal was to stop inflation, which reached a 40-year high last year for most of the developed world. Despite never growing to two-digit numbers, the USA was rather scared about the inflationary trend.
With the aggressive monetary tightening policy by the Fed, inflation is finally starting to come down to significantly lower levels. The latest data of US inflation shows a 1% monthly decline to 5%. The Fed’s target is 2%.
In March, core inflation was higher than general inflation for the first time. This meant that, while food and energy prices were stabilizing to pre-inflation levels, housing and services were still extremely high.
Core inflation is usually the Fed’s main indicator for assessing their monetary policy. It’s the measure that signals a further interest rate hike tomorrow.
A plea to stop
These massive interest rate hikes are threatening the fabric of the American banking system and, therefore, of the economy as a whole.
Last weekend, America’s second largest bank collapsed: First Republic owned $229 billion in assets and was acquired by JPMorgan. Two months ago, Signature and Silicon Valley Bank both fell into pieces, shaking the global banking system.
On Monday, a letter by American lawmakers pleaded to the Federal Reserve to stop hiking interest rates. The letter, signed by prominent Democratic leaders like Elizabeth Warren and Brendan Boyle, asked the Fed to consider the effects a recession would have on workers and small businesses.
Though unemployment is at an all time low, especially in minority groups, the United States seems to be heading towards a recession. GDP growth in the first quarter disappointed experts and analysts, and the collapse of First Republic is just another piece of a falling domino.
The most optimistic projections have an American recession starting by the end of the year. If accurate, the US will likely be preceded by the EU and the United Kingdom, whose economy is grinding down to a halt.
A mild recession could last between 12 and 18 months, possibly ending by the end of 2024. Inflation, on the other hand, should be definitely dealt with by this September if, again, projections are accurate.
In short, going back to normal economic levels before 2025 is extremely unlikely.
