“In wanting to bring down inflation, many observers are wondering if the Fed is not in danger of triggering a recession”
Ihe US Federal Reserve (Fed) is determined to lower inflation. But no one knows by how much it will have to increase its key interest rate, and for how long it will have to keep it at a high level to achieve its objective. Also, many observers wonder if it might not trigger a recession.
Inflation is falling, partly due to the resolution of problems in supply chains, partly due to lower demand. High interest rates have slowed the residential real estate market, and therefore the pace of construction. The rise in the price of goods and services restricts household spending and consumption. For now, China’s sluggish growth is limiting commodity prices.
But the Fed is not satisfied. At the moment, the labor market is hypertensive. Until it eases, the Fed fears that wages will catch up with inflation, thus pushing it up. Above all, she does not want to take a break, especially since the financial markets are optimistic and the price of financial assets is rising, which is encouraging demand. This would force it to raise interest rates again, and for a long time. Even if unemployment increases slightly, the Fed will not change policy. It believes that if the economic slowdown becomes too severe, it will be able to encourage a return to growth by lowering rates. There is therefore a certain consensus around the idea that it risks… doing too much.
Two scenarios are therefore possible. First scenario, the Fed sends the economy into recession, with inflation remaining stubbornly above its target value of 2%. Such stagflation would push the Fed to raise rates further just as the economy is contracting.
Second scenario, inflation decreases, but with a sharp drop in growth. SMEs, which kept their staff because they had difficulty finding workers (unlike large companies which are already announcing layoffs), could then also lay off. In other words, the layoffs we are already seeing could turn into a huge flood!
Navigate between Charybdis and Scylla
This would affect other markets, especially real estate. Rising rates have slowed home sales. But if there are more layoffs, more and more owners will be unable to repay their loans and forced to sell off. Supply will then rise sharply, house prices will fall by a similar amount, and the combination of greater job uncertainty and falling housing wealth could shake consumer confidence, further reducing the growth.
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