The Federal Reserve is experiencing increasing difficulty in balancing highly elevated inflation with a rapidly growing economy, as evidenced by the continued rise in the consumer price index (CPI) and other measures despite dramatic interest rate hikes.
Specifically, the CPI rose to 9.1 percent in June, which represented a new 40-year high.
Consequently, the central banks have indicated that they are willing to risk the chance of a potential recession if it means bringing inflation under control, as a recession will help to ensure that elevated prices do not become a permanent fixture in the economy.
Several other factors are compounding the current economic landscape, including the ongoing war in Ukraine, COVID-related issues across Asia, and other issues beyond the control of the Federal Reserve.
The nation’s central bank is expected to announce another interest rate increase this week, or the intention to hike an interest rate by 0.75 percent.
The interest rate hikes represent a dramatic policy reversal of zero interest rates following the pandemic, which was designed to dramatically enhance liquidity and circulate it throughout the financial system.
The economic response was swift, with the low interest rates encouraging many to borrow money for purchasing cars, homes, and other goods when the global supply chain system remained mired in issues related to lockdowns from mainland China.
However, the rapid recovery of the economy also has led to a dramatic increase in inflation, where the effects have been particularly obvious in petrol stations and grocery stores.
In response, the Federal Reserve has been to increase interest rates significantly to reduce the money supply.
Treasury Secretary Janet Yellen has admitted that “growth is slowing” on an economic front. However, at this juncture in time, she does not believe that a recession is inevitable.
“I’m not saying that we will definitely avoid a recession,” Yellen informed NBC, “but I think there is a path that keeps the labor market strong and brings inflation down.”