Macroscope | US Federal Reserve’s inflation fight could ruin the economy it’s trying to save

The Fed is expected to raise interest rates again next month, but encouraging job numbers and other data suggest the worst might be over

It’s time for the US central bank to pause and reset its policy intentions as further tightening would be overkill when the economy can least afford it

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Customers browse racks of clothing at a discount store in Las Vegas, Nevada, on May 7. The odds are that we have probably seen the worst of inflation in the US. Photo: AFP

Published: 10:00pm, 10 Oct 2022

The markets are gripped with a growing sense of dread that the Federal Reserve is about to push the US economy over the edge into a deeper recession in its quest to stamp out inflation. However, there is another side to debate – the question of whether the central bank should do this at the expense of economic confidence, sustainable recovery and global financial stability.

After all, the US economy is already in recession, borrowing costs have shot up in recent months and market confidence is wobbling. While expectations are high that the Fed will hammer through a fourth successive interest rate increase of 75 basis points in November, it could instead blink and pivot interest rate policy away from overkill. The jury is still out.

The Fed came into rate tightening late in the day, but it doesn’t follow that it will make the same mistake and end up behind the curve when it’s time to ease off the monetary brake.

Clearly, the Fed has a good case to keep tightening. Core inflation is running above 6 per cent when it should be closer to the central bank’s 2 per cent inflation target, especially when the economy is running at full employment.

If the Fed’s mandate is to keep price rises under stricter control, then it has some catching up to do, even if the economy has slipped into negative growth in the past two quarters, the textbook definition of a technical recession.

The US economy is not showing all the hallmarks of a true recession, though, with the latest employment data last week underlining the Fed’s dilemma. The headline non-farm payrolls are doing fine, with a 263,000 jobs added in September, in line with expectations, and just a little lower than August’s 315,000 headline rate.

.css-1m2rp1p{color:#34b8b5;}Macroscope | US Federal Reserve’s inflation fight could ruin the economy it’s trying to save

Macroscope | US Federal Reserve’s inflation fight could ruin the economy it’s trying to save