US Federal Reserve to raise interest rates, recession fears heighten

By Al Mayadeen English
Source: Agencies
21 Sep 2022 10:54
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Another interest rate hike is coming, increasing the possibility of a recession.

A security guard walks by an image of the Federal Reserve. (Reuters)

The Federal Reserve will be increasing interest rates Wednesday - for the fifth time this year - in a desperate attempt to cool the economy and reduce the country's highest inflation in 40 years. However, recession appears to be the big elephant in the room, as fears of a major recession are heightening.

The economic situation which is affecting the financial standpoints of American families and businesses is burdening US President Joe Biden's popularity, which will affect his chances of winning the midterm congressional elections which will take place in early November.

Fed leaders believe that their job is not just to slow demand in the economy, but also to strengthen the public’s trust in the central bank because if people lose trust in the government’s capacity to keep inflation under control, the Feds will not be able to impose further increases in case the crisis develops unexpectedly.

Jerome Powell, the Fed's chair, said that he will continue to act aggressively to fix the economy and evade a scenario similar to that of the 1970s and 1980s, which was the last period of time when inflation rates were on a skyrocketing increase.

When the meeting ends on Wednesday, economists are expecting another three-quarter point rate hike, which is an unprecedented move since the aforementioned period. There is even a chance that the Fed would make a full-point hike.

"Since inflation began to accelerate in early 2021, Fed officials have been overly optimistic that it would quickly recede to the central bank's 2% target," economists Mickey Levy and Andrew Levin wrote for The Wall Street Journal. "The economy now faces a serious risk of persistent high inflation."

By mid-August, the Fed increased the benchmark borrowing rate four times this year, including two massive 0.75% in June and July after US annual inflation spiked to 9.1% mid-year.

It seems the Fed is inclined toward increasing the aggressiveness of its policies put in place to combat inflation. That would drastically affect the national economy and increase the chances of recession.