Federal Reserve Chairman Jerome Powell sworn in for a second term (getty)
The minutes of the Federal Reserve (US Central Bank) meeting, which was held at the beginning of this month, and was released on Wednesday, showed the agreement of most of the bank’s officials on the need to follow a restrictive policy, including interest rate hike The bank will spend half a percentage point on the bank’s money at each of the next two meetings, in order to give monetary policy makers some flexibility to loosen policies later if necessary, before the end of this year, in order to avoid the economy entering a recession.
In recent months, the US economy has suffered from an unusual phenomenon, as the rate of… hyperinflationby American standards, and a very low unemployment rate, by American and global standards, which made the task of the Federal Reserve more difficult, which is to achieve the so-called safe landing, that is, eliminating inflation without causing an economic recession.
While last month’s data showed that the annual US inflation, as measured by the consumer price index that most expresses inflation according to the Federal Reserve, remained above the 8% level, the Ministry of Labor confirmed three weeks ago that the unemployment rate remained close to its lowest level in more than half a century, recording 3.6%. It is the lowest since February of 2020, which witnessed the beginning of the spread of the Covid-19 virus on American soil, imposing the closure of companies and the layoff of millions of employees in an attempt, which later proved unsuccessful, to limit its spread.
In most cases, economic analysts treat low unemployment rates as a positive phenomenon for any economy, but the current high inflation rate in the United States portends negative repercussions on the economy if the low unemployment rate causes companies to race to hire workers with high wages, which leads to The occurrence of new rises in production costs, and causes more inflationary pressures.
With the Federal Reserve’s tendency in recent months to raise interest rates, and follow more restrictive policies, the result in most cases is a contraction of the economy, and then an increase in the unemployment rate.
The current economic scenario is not unfamiliar on the US soil, as the US economy has not had an inflation rate above 8% since 1951 and an unemployment rate of less than 4% at the same time.
As the unusual situation in the US economy continues to deteriorate, many economists, including the Egyptian-American economist Mohamed El-Erian, the CEO of JPMorgan Chase, the largest US bank, Jamie Dimon, and CEO of Pershing Square Capital and Bill Ackman, asserted, That the Fed is too late to raise the yield curve on the dollar, and that in the coming period it must act more aggressively, in order to prevent explosive inflation from getting out of control.
At the beginning of this week, the media addressed some of the words of Lawrence Summers, the former US Treasury Secretary, in which he stated that “every time the inflation rate rose above 4%, and the unemployment rate was less than 5% during the past 75 years, the American economy fell into recession for a period not exceeding two years.
With the historical paradox achieved during the period from last September until now, the Federal Reserve does not seem ready to avoid a stagnation of the economy in the midst of its fight once morest inflation, which prompted its president, Jerome Powell, in a recent press interview, to confirm that he “does not promise to achieve a safe landing in which the rate of decline falls.” Inflation to 2% while the labor market remains at its current strength.
In a recent article, Leslie Lipschitz, a former official at the International Monetary Fund’s Institute for Capacity Development, confirmed that the Federal Reserve Chairman and his colleagues on the Federal Open Market Committee “are trying to adjust monetary policy in a task as difficult as crossing Niagara Falls on a tightrope,” stressing that ” It is necessary for those who are betting on their success to examine the indicators for the near future in the best possible way.”
In her analysis of the factors causing the high rate of inflation in recent months in the United States, Lipschitz noted that “policies that create significant demand stimulus in an economy that is already close to full potential must lead to increased inflation rather than output,” stressing that the Covid shock in Restricting supply capacity As much as it restricted demand, before the war in Ukraine finally came to overwhelm potential production potential in many sectors of the economy.
On this basis, Lipschitz concluded that “financial policy has drained a great deal during the past period, and its reserve capabilities have become very few, which has placed more restrictions on supply in the American economy,” and added: “Monetary policy in recent months has gone beyond just transforming this waste. The financial asset turns into money, to increase the ignition of inflation in asset prices, the collapse of bond yields, and the reduction of the risk factor,” noting that these are the reasons for falling into the current impasse, which is characterized by high inflation, low growth, and the deterioration of financial asset prices.