There is still a good week to go, the third quarter of this year, and if the indicators are not misleading, then the US economy has not grown at all or at most only slightly in the summer after the slight decline in production in winter and spring. What sounds like bad news is actually exactly the message that the US Federal Reserve (Fed) was hoping for before its regular key interest rate meeting this Wednesday: the goal of the monetary watchdogs is to increase American investment and consumer demand as much as possible dampen the fact that growth, prosperity and the labor market are not collapsing, but the extremely high inflation rate of 8.3 percent recently is falling step by step towards the target value of around two percent. Overly euphoric economic news would only be a hindrance on this path.
Before the start of the meeting, almost all experts therefore assumed that the Fed would continue the course of the past few months and its most important ones policy rate, the so-called call money target range, will increase by 0.75 points to three to 3.25 percent for the third time in a row. Looking at the latest figures on inflation, a few experts even expected an increase by a full point: They pointed out that although the inflation rate fell in August for the second time in a row, the reduction is progressing much more slowly than hoped. The Fed’s Monetary Policy Committee meeting was still ongoing at the time this issue went to press.
After the start of the rise in inflation in spring 2021, central bank chief Jerome Powell and his colleagues had long bet that the price problem would solve itself once the corona-related supply bottlenecks around the world were resolved. At the latest with the Russian attack on Ukraine, however, it was clear that this hope would not be fulfilled. Since then, the Fed has ended its zero interest rate policy to support the economy and increased its benchmark rate at a rate not seen since the 1980s. However, the line that Powell walks is a fine one: Every supposedly defensive statement is immediately understood on the stock exchanges as an invitation to restart the price fireworks of the past and create new speculative bubbles. Conversely, overly aggressive rhetoric can cause the stock and real estate markets to collapse, triggering an economic downturn.
The Fed itself expects its course to cause “pain”.
In the past few months, the Fed leadership has therefore tried to make it clear that the fight against inflation should not result in a deep recession, but that it will probably not proceed entirely without “pain” on the labor market either. Since then, politicians, companies, citizens and stock market traders have been puzzling over how high the key interest rate will rise, how long it will remain above four or even five percent and how many job losses Powell could accept until his personal pain threshold is reached. Many experts assume that the unemployment rate will have to rise from the current 3.7 to six or even seven percent in order to significantly and sustainably reduce the overall economic pressure on consumption, wages and prices.
This would put Powell in a quandary, after all, according to the Fed’s statute, the highest possible level of employment is just as important a goal as securing stable prices. President Joe Biden was also in trouble, because as much as he is hurt by the high inflation rate in the opinion polls, he has little interest in the fact that unemployment figures are soaring.
The Fed’s job is made even more difficult by the fact that its decisions have to take into account all the duplication and feedback effects that the interest rate hikes in dozens of other countries are also having United States entail. For example, the Swedish National Bank surprisingly raised its most important key rate by a full point to 1.75 percent on Tuesday. The central banks of the UK, Norway, South Africa, Taiwan, Indonesia and Switzerland, among others, could follow suit on Thursday with similar moves. In the past few days, individual experts had warned of an uncoordinated race to raise interest rates because the decisions of many central banks would always have repercussions beyond the respective national borders. If the interactions are not considered, the economic headwinds around the world could grow into a storm that completely stifles global growth.
After all: Such pessimistic scenarios continue to be contrasted with rather optimistic ones. Charles Evans, President of the Chicago Regional Reserve Bank, said recently that he assumes “that we will be able to keep the unemployment rate at around 4.5 percent until the end of our task”. Measured against many other forecasts, that would actually be a success. But it would still mean that an additional 1.3 million women and men would lose their jobs – including, according to experience, an above-average number of blacks and people of Latin American descent.