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Tuesday, September 27, 2022

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Fed: “there are no guarantees” to tame inflation without job damage

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US Federal Reserve Chairman Jerome Powell said on Wednesday that “no guarantees” that the US central bank can tame runaway inflation without hurting the job market.

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Speaking before a forum of the European Central Bank (ECB) in Sintra, Portugal, Powell reiterated his hope that the Fed can achieve a so-called soft landing, that is, raise interest rates enough to slow down the economy and prices at the same time. consumer without causing a recession that would sharply raise the unemployment rate.

We believe we can do it. It is our goal”, he said, but added that the Russian invasion of Ukraine made the task more difficult by disrupting trade and raising the prices of food, energy and chemicals.

“It has become more difficult”, Powell said. “The roads have narrowed.”

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The president of the ECB, Christine Lagarde, spoke of the “high impact” of energy shocks, which reverberate around the world, but are felt most acutely in Europe because it relies on Russian oil and natural gas. He further highlighted Europe’s proximity to the war in Ukraine and said there was a “vast underestimation of energy” in the assessment of inflation made by the bank.

The ECB and the Fed were slow to recognize the inflation threat that emerged just over a year ago. They believed that rising prices were a temporary result of minor hitches in the supply chain as the economy recovered with unexpected speed from the brief but devastating pandemic-driven recession beginning in 2020.

However, the inflationary acceleration continued. The Fed raised its benchmark short-term rate in March and May, and was apparently set to raise it by half a percentage point at its June 14-15 meeting, but then the Labor Department reported that consumer prices had risen 8.6 % in May from a year earlier, the biggest jump since 1981. The Fed responded with a three-quarter percentage point rate hike, the biggest increase since 1994.

The ECB is trailing the Fed but has said it will raise rates in July for the first time in 11 years and again in September to attack inflation that has hit a record 8.1% in the 19 countries that use the euro. In a speech opening the forum on Tuesday, Lagarde said the bank will be gradual in its raises but will keep options open to “to turn off” inflation if it rises faster than expected.

Economists fear raising rates will plunge the economy into a recession, but Powell noted that the labor market is strong — unemployment, at 3.6%, is the lowest in half a century — and that most households and businesses they had good savings.

Total”, said“the US economy is in a good position to withstand further tightening of monetary policy”. Lagarde said the same thing was happening in Europe.

Source: Gestion

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