According to a study by Deutsche Welle, central banks typically tighten monetary policy when the economy starts to experience significant inflation; however, the rate of tightening slows down as inflation rates rise.
Although price increases and inflation began in March 2021, the US Federal Reserve, which was reportedly tardy in acting, did not begin to address inflation until after a working year.
The Fed raised interest rates five times in 2022, the final time in September of last year, by 25 basis points, 50 basis points, and 75 points three times in a row.
The last time US inflation got close to the Fed’s 2 percent target was around 19 months ago.
Costs in every sector increased dramatically during this time, but particularly those of food and energy, until inflation in the biggest economy in the world in June reached 9.1%, the highest level in more than 40 years.
The Fed has confirmed that it would continue to tighten monetary policy until inflation is “tamed,” which may exacerbate concerns about a recession in the US economy even though inflation has already started to decrease, reaching 8.3% in August.
No one can say for sure how evident the risk of a recession in America is, but Dara Maher, head of research for the Americas at HSBC, noted that continuously high inflation means the probability of a recession is rising.
Maher argued that while slow growth is a vital component of the fight against inflation, it is not an acceptable side effect.
The economy in the United States performed poorly throughout the first half of this year, with growth contracting by 1.6% in the first quarter and by 0.6% in the second.
According to Maher, “Policy experts fear the likelihood of stagflation in America, which is an economic downturn followed by excessive inflation, as the country did in the 1970s and early 1980s.”
According to the research, despite the US Federal Reserve’s efforts to reduce excessive inflation rates through a series of interest rate rises, the economy experienced a severe recession that lasted for two years and saw the country’s jobless rate rise to 10%.
On Monday, the UN issued a warning that an increase in interest rates in wealthy Western nations might trigger a global economic downturn.
Will the US economy enter a recession as a result of Fed policy?
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