“By wanting to lower inflation, many observers wonder if Fed is not likely to trigger

The American Federal Reserve (Fed) is determined to lower inflation. But no one knows how much it will have to increase its key interest rate, and for how long it will have to maintain it at a high level to achieve its objective. Also, many observers wonder if it is not likely to trigger a recession.

Inflation decreases, in part due to the solving problems in the supply chains, in part due to the drop in demand. High interest rates have slowed down the residential real estate market, and therefore the construction rate. The rise in the price of goods and services restricts the expenses and consumption of households. For the moment, the anemic growth of China limits the price of raw materials.

But the Fed is not satisfied. For the moment, the labor market is hypertensive. While waiting for it to relax, the Fed fears that wages will catch up with inflation, thus pushing it upwards. She especially does not want to take a break, especially since the financial markets are optimistic and that the price of financial assets increases, which encourages demand. This would force her to further increase interest rates, and for a long time. Even if unemployment increases slightly, the Fed will not change politics. She believes that if the economic slowdown becomes too large, it can encourage the return to growth by lower rates. There is therefore a certain consensus around the idea that it risks … to do too much.

Two scenarios are therefore possible. First scenario, the Fed brings the economy into recession, with inflation remaining obstinately above its target value of 2 %. Such a stagflation would push the Fed to further increase the rates at the very moment when the economy contracts.

Second scenario, inflation decreases, but with a sudden fall in growth. SMEs, who kept their staff because they had trouble finding workers (unlike large companies that already announce layoffs), could also dismiss. In other words, the layoffs we are already witnessing could turn into a huge flow!

Navigate between Charybde and Scylla

This would affect other markets, in particular real estate. The increase in rates has slowed down home sales. But if there are more layoffs, more and more owners will be unable to repay their loan and forced to sell in disaster. The offer will then increase suddenly, the prices of houses will fall all the way, and the combination of greater uncertainty in terms of employment and a drop in real estate wealth could shake the confidence of consumers, which will further reduce growth.

You have 31.99% of this article to read. The continuation is reserved for subscribers.

/Media reports cited above.