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Friday, January 27, 2023

United States: Lack of Inflation without Economic Recession?

On Wednesday, November 2, as predicted by most analysts, The United States Monetary Authority raised its reference rate by 375 basis points; taking it from 3.25% to 4.0%This is its highest level since the global crisis of 2008. Sixth increase since last March and fourth consecutive increase of 75 points, Similarly, it decided to retain the current rate of monthly liquidity withdrawal.

Clearly, given the current inflation scenario, the Federal Reserve has decided to maintain its current and conservative restrictive monetary policy; That is: a rise in rates and a drain of liquidity.

Here some fundamental questions arise: How will this strategy affect the level of activity, when and at what pace will the activity end? Through traditional “press releases” and subsequent statements by the unit’s chairman, Jerome Powell, clues can be found about the Fed’s current thinking on the issues raised. Indeed, the said document highlights the following points:

From the “release” in question it can be concluded that, at least for now, Economic activity has not declined and inflation has still not subsided, Given this scenario, the important question isHow the current restrictive monetary policy will continue and what will be its impact on activity levels.

For his part, the President Jerome Powell He was very clear in later statements: Priority is to reduce inflationfor which “everything that is necessary shall be done” (sic”‘); but take caretogether, The inevitable slowdown in activity levels – the product of a rise in rates and withdrawal of liquidity – is only a recession (a reduction in growth rates) and not a recession (a fall in GDP).

In this regard, it confirmed what was said in the “Communique” in the sense that in the next steps, not only the minor effects of the measures already taken will be taken into account, but also time lags (the “gap”) that exists between monetary decision making and its effects on inflation and growth, In other words, the unit is in agreement in the sense that the measures are “accumulating” which will undoubtedly have a greater impact in the coming months. Hence, it leaves open the possibility that growth may slow down soon; under pain that the new adjustments – added to those already submitted – would promote a “more feedback” Which can lead to recession.

That said, to this day our The “baseline scenario” indicates that – barring a change in the current situation – by December the monetary authority will begin to slow the rate of new growth.: 50 basic points in the above month’s meeting and 25 additional and consecutive points in February and March; reaching a peak rate of 5%. From then on, and taking into account the temporary delay of adjustments already made, a phase of monetary tightening will begin, leading to a gradual reduction in the reference rate. To hold this baseline scenario, Inflation – as we believe – should continue its downward trend that started with 9.0% recorded in June compared to 7.7% in October, For its part, in line with the above, starting in the first half of 2023, economic activity should see a new cycle of modest growth in GDP growth.

According to these hypotheses, The economy will not go into recession, rather the opposite – only the growth rate will decelerate from 2.8% in 2021 to a range of 1.0% to 1.5% in 2022, Just like that, Inflation should fall in the range of 6% to 7%, Regarding 2023, the Fed in its latest projections projects a new decline in growth rates within the range of 1.5% to 2.0% and inflation of the order of 4.0% to 5.0%.

If this were the case, the monetary authority would have been successful in its anti-inflationary policy; That is: it will achieve a change in trend in rising prices without falling into a bearish position, which means all positive results.

One last comment. in recent statements Kristalina GeorgievaIMF number one said in line with our baseline scenario that “It is quite possible that the major economies are nearing the peak of their respective rates.”

Conocé The Trust Project
World Nation News Desk
World Nation News Deskhttps://worldnationnews.com/
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