The chances of a soft landing in the US economy are looking increasingly slim, according to US Federal Reserve chairman, Jerome Powell, as the central bank persists in its unwavering battle against inflation.
Last week, the Fed announced its third 75-basis-point (bp) hike in a row, taking the benchmark rate to a range of 3 to 3.25 per cent. It also updated its forecasts for a peak of 4.6 per cent to be reached next year compared to a peak of 3.8 per cent expected previously.
“No one knows whether this process will lead to a recession or, if so, how significant that recession would be,” Mr Powell warned at a recent press conference.
“That’s going to depend on how quickly we bring down inflation.”
The latest move follows a commitment made by Mr Powell earlier this month to continue tackling inflation “until the job is done”.
The US inflation rate eased to 8.3 per cent in August, down from 8.5 per cent in July and decades-high peak of 9.1 per cent in June, but remains well above its target of 2 per cent.
“We have got to get inflation behind us. I wish there were a painless way to do that. There isn't,” the Fed chairman suggested last week.
“Higher interest rates, slower growth and a softening labour market are all painful for the public that we serve. But they’re not as painful as failing to restore price stability and having to come back and do it down the road again.”
Federated Hermes senior economist, Silvia Dall’Angelo, said it was clear that the Fed was willing to tolerate these trade-offs in order to combat inflation.
“Granted, as monetary policy works with a lag and the COVID recession might have left structural marks on the economy, there is uncertainty about the degree of monetary tightening that is required to bring inflation back to target without hurting the labour market too much,” he said.
“At this stage, based on the trade-offs it is facing, the Fed is willing to take the risk of overdoing it.”
UK recession may already be underway
After delaying its announcement following the death of Queen Elizabeth II, the Bank of England (BoE) also delivered its latest rate decision last week with a hike of 50 bps to 2.25 per cent.
The increase came despite the central bank predicting that the UK economy has entered into a recession. A 0.1 per cent decline in GDP is expected in the third quarter, down from an earlier prediction of 0.4 per cent growth, after the 0.1 per cent decline already seen in Q2.
“The scale, pace and timing of any further changes in bank rate will reflect the committee’s assessment of the economic outlook and inflationary pressures,” the BoE said.
“Should the outlook suggest more persistent inflationary pressures, including from stronger demand, the committee will respond forcefully, as necessary.”
Inflation is now expected to peak at just under 11 per cent in October, versus a peak of 13 per cent forecast previously.
Like the Reserve Bank (RBA), the BoE has stressed that it is “not on a pre-set path” and that it will consider and decide the appropriate rate at each of its future meetings.
Ms Dall’Angelo said that the central bank’s forward guidance was meant to provide it some additional flexibility in a highly uncertain environment with competing and evolving risks.
“In our base case, the Bank of England will add some 75-bp tightening over the balance of the year, to a peak rate of about 3 per cent by year-end, but the deteriorating economic picture will force a pause towards the end of the year,” she predicted.
“The Reserve Bank Board expects that further increases will be required to bring inflation back to target. We are not on a pre-set path, though,” RBA governor Philip Lowe told the House of Representatives Standing Committee on Economics earlier this month.
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
