Is recession the only way out of the US inflation scourge?

Unemployment may need to rise sharply as the US Federal Reserve tries to slow the economy and stem rising inflation

A massive rate hike by the US Federal Reserve and promises of more to come are fueling warnings that the only catastrophe of the scorching price hikes engulfing American families is a full-blown recession.

The Fed remains hopeful it can slow activity and demand, cooling the scorching pace of inflation, without derailing the world’s largest economy. But skepticism about the chances of success is growing.

The massive rate hike came as the Fed is under intense pressure to curb rising gas, food and housing prices, leaving millions of Americans struggling to make ends meet, and President Joe Biden’s approval ratings plummet.

Fed Chair Jerome Powell said recession is not the goal, but that cutting inflation “quickly” is “essential” as it is vital for a healthy economy.

The Fed will need a Goldilocks scenario where “some things fall into place and at the right time,” she told AFP.

In the wake of the Fed decision, mortgage rates rocketed to their highest level in 13 years, with the average for a 30-year fixed-rate home loan reaching 5.78 percent.

“My colleagues and I are well aware that high inflation poses significant hardships, especially for those least able to meet the increased costs of essentials such as food, housing and transportation,” Powell told reporters. after the rate hike was announced.

With the shift toward aggressive tightening of credit conditions — which policymakers see soaring to 3.8 percent next year — the best the Fed can hope for now is a “soft” landing, which will include higher unemployment.

The Fed chief said, “An unemployment rate of 4.1 percent with inflation well on its way to two percent, I think that would be a successful outcome.”

But a half-point increase in the unemployment rate could signal the start of a recession.

– Rising risks –

But the central bank will have to cut demand, and “it will be painful, even if it is not a technical recession.”

But it’s a risk the Fed is willing to take, as it has made fighting inflation a priority.

“The Fed is concerned that if it doesn’t take care of inflation now, it will stick around and be a problem for many years into the future,” she said.

Originally published as Is Recession the Only Way Out of the US Inflation Plague?