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Two major interest rate hikes are possible in the next three months. Will this push the US economy into recession?
On Thursday, July 7, two policymakers from the Federal Reserve announced that the US central bank can announce two big interest rate hikes. This first-rate hike will come by this month of July and another in September this year.
Interest Rate Hikes
Fed Governor Christopher Waller believes that the interest rate hikes are necessary to arrest the surging inflation. He said that the Fed will take all necessary measures to bring inflation under permissible goals, even if it slows the economy. Waller told the National Association for Business Economics:
“I’m definitely in support of doing another 75 basis point hike in July, probably 50 in September, and then after that we can debate whether to go back down to 25s. If inflation just doesn’t seem to be coming down, we have to do more.”
During the last month of June 2022, the Fed already approved a 75 basis points surge, the highest since 1994. Wall Street analysts have been already expecting another such move in July. As per analysts, the Fed will continue with its market rate hikes until it hits the range of 3.25%-3.5% by the end of 2022. This happens as the Fed combats inflation which is currently at a four-decade high. Waller added:
“Inflation is a tax on economic activity, and the higher the tax the more it suppresses economic activity. If we don’t get inflation under control, inflation on its own can place us in a really bad economic outcome down the road.”
Thus, Wall Street investors might need to swallow the bitter pill of slowing economic activity until inflation seems under control. This has also raised severe concerns about the US economy slipping into recession.
War on Inflation
Amid excess money printing during the COVID-19 pandemic, inflation has taken a toll on the US economy. Inflation has surged beyond 8% forcing the Fed to initiate tough monetary policies. As the Fed looks to reduce its debt by pulling the money back from the market, businesses are likely to turn conservative on spending.
We have been seeing businesses looking to cut down on new hirings recently. Later today, the US Labor Department shall be unveiling the jobs data giving further clarity about the health of the US economy. St. Louis Fed President James Bullard also supported Fed governor Waller on his views. Bullard, a Federal Open Market Committee voting member this year said:
“I think it would make a lot of sense to go with the 75 at this juncture. I’ve advocated and continue to advocate getting to 3.5% this year, then we can see where we are and see how inflation’s developing at that point.”
However, both officials believe that the recession fears are overblown.