Fed can control inflation, not sure about recession

WASHINGTON: The Federal Reserve can bring the runaway inflation in the United States under control although there is no guarantee that its rate hikes will not cause a recession, the central bank’s head for the state of Minneapolis, Neel Kashkari, said Thursday.

“The Fed understands how to control inflation, but the question is whether we can do so without a recession,“ Minneapolis Fed President Kashkari said during a live-streamed discussion on the US economy, reported Sputnik.

The Fed has raised interest rates four times since March, bringing them to a peak of 2.5 per cent from a high of just 0.25 per cent in February. The central bank says it expects to continue with rate hikes until inflation returns to its target of 2 per cent per year.

Inflation, as measured by the Consumer Price Index, grew by 8.5 per cent during the year to July after expanding at a four-decade high of 9.1 per cent in the 12 months to June.

The problem for the Fed, however, is that the economy has also slowed since the start of this year, with gross domestic product, or GDP, registering a negative 1.6 per cent in the first quarter and a preliminary 0.9 per cent negative reading for the second quarter.

Conventionally, two straight quarters of negative GDP growth mean a recession. But both the Fed and the White House have tried hard to dispel the notion of an economy tanking in an election year, with Americans heading to the polls in November as President Joe Biden’s popularity suffers from the spiralling cost of living.

“I don’t think we are in a recession right now,“ Kashkari said, pointing to the labour market, which has been the juggernaut of the US economy.

Unemployment among Americans reached a record high of 14.8 per cent in April 2020, with the loss of some 20 million jobs after the Covid-19 breakout. Since then, hundreds of thousands of jobs have been added every month. The trend did not let up in July, with some 528,000 positions added — more than twice the level forecast — despite the economy technically being in a recession after two straight quarters of negative GDP.-Bernama