The US Federal Reserve should navigate carefully now
SummaryThe US central bank’s task of taming inflation with minimal economic pain is complex and consequential
Suddenly, the global inflation/recession debate has become two-sided. For much of 2022, the mantra on the street was that central banks around the world need to raise interest rates aggressively in such a manner that alarmingly high levels of observed inflation do not feed into inflation expectations. Higher inflation expectations that hold for an extended period have a nasty habit of becoming entrenched, with a disproportionate impact, particularly on those who are not well off. Slow off the block in its fight against price-instability, the US Federal Reserve has raised interest rates in the US eight times since March 2022, from around 0% to 4.5% now. It is widely expected to raise rates at least twice more to about 5%. The Fed uses the federal funds rate as its policy mechanism; this is the target interest rate set by the US Federal Open Market Committee (FOMC) for overnight loans between banks.