Inflation vs. Interest Rate: What ‘soft landing’ is the Fed talking about? | Univision money news

The Federal Reserve (Fed) seeks to rein in rampant inflation by striking a kind of complex balance between slowing the economy (by raising interest rates) and protecting growth (avoiding a recession).

By raising the interest rate, the Fed is putting pressure on the economy, which is something that it should act to control rates. The Consumer Price Index (CPI) on an annualized basis at 8.6%, far from the 2% target set by the authorities.

The problem is that raising interest rates is also, if it goes too far when those brakes are pressed, a recipe for causing a recession (technically, two quarters of negative growth), the worst effect of which is usually higher unemployment.

This is why the Fed is talking about “soft landing”.

What is soft landing?

“A weak fall brings inflation back to 2% while we manage to maintain a strong labor market. This is challenging for a number of reasons,” the Fed chief said. Jerome Powellin a recent interview with the shop. “Nobody thinks it’s easy, but we think there are ways to do it,” he added.

In academic terms, a “soft landing” is a periodic slowdown in economic growth that avoids recession and is the central bank’s goal when seeking to raise interest rates enough to prevent the economy from overheating and the economy suffering from high inflation, without causing a severe recession. Recession. A “soft landing” can also refer to a gradual and relatively painless slowdown in a particular industry or economic sector.

In the event what the Fed wants to do here in the US is raise the interest rate to contain inflation and reduce the possibility of a recession.

According to the US macroeconomic media, a large group of economists still believe that a soft landing is possible, although they know that it will not be easy.

“With any luck, the economy could maintain very low unemployment rates, sluggish economic growth, and gradually ease inflation into 2023 and beyond,” David Kelly, chief global strategist at JPMorgan Funds, wrote in a recent comment.

As Powell said in his interview with the shop The Fed’s tools are more effective since its last “inflation war” in the 1980s.

He asserts that this improvement in his instruments makes it possible to hit the “soft landing”.

However, after that interview, which was published on May 12, the CPI showed no logical signs after raising rates twice.

To somehow explain it, Powell put a strong brake on the economy, thus dispelling hope of a smooth landing. Even President Joe Biden acknowledged in an interview with the Associated Press that a recession is “not inevitable.”

How much recession risk is there?

Is there a real danger of us entering a recession only two years after overcoming the last recession?

At the moment, most economists do not expect to fall into a recession, despite inflation, consumption remains high, which is the main driver of the US economy.

In addition, companies continue to invest in equipment, which reflects their positive outlook for the future. And the labor market is still very strong, with many hirings and few layoffs.

“Nothing in the US data suggests a recession is imminent,” Rubella Farooqui, chief US economist at High Frequency Economics, wrote, as quoted by the Associated Press. “Job growth remains strong and households continue to spend,” Farooqi said.

However, Farooqi also warns that “the economy is facing headwinds”.

In other words, data indicating the risk of a recession is mounting: High inflation has proven more stubborn than economists and the Federal Reserve had anticipated.

If Powell fails his “soft landing”, The Federal Reserve could cause a recessionpossibly in the second half of next year, economists say.

Not surprisingly, the US economy is fueled by ultra-low interest rates and may not tolerate a much more expensive cash rate scenario.

Leave a Comment