After responding to the shock of the pandemic, the US Federal Reserve is once again being tested. Challenges and pressures are mounting now that the Fed has started raising interest rates and inflation has soared to its highest rate in 40 years, reaching 6.4% in February, according to the US Department of Commerce. Can the Fed curb inflation without tipping the US economy into recession? The challenge for the central bank is whether it can engineer a soft landing for the US, where inflation is reduced, employment remains steady and growth slows but does not turn negative.
Jerome Powell, the Federal Reserve chair, appears confident. At the Fed’s monetary policy meeting on March 16, it raised its benchmark short-term rate by the customary quarter percentage point, to a range of between 0.25% and 0.5%, and signalled six more rate increases this year, the most aggressive pace of monetary tightening since 2008. Following the meeting, Mr Powell said to reporters: “The probability of a recession in the next year is not particularly elevated. And why do I say this? Aggregate demand is currently strong and most forecasters expect it to remain so ... The labour market, also very strong … Household and business balance sheets are strong. And so, all the signs are that this is a strong economy – indeed, one that will be able to … withstand …. less accommodative monetary policy.”
