The need for the Federal Reserve (Fed, the American central bank) to fight inflation with a very strong cycle of interest rate hikes should lead the US into a slight recession from the fourth quarter, which should extend until 2023, he comments in an interview. to Estadão Vincent Reinhart, chief economist at Dreyfus and Mellon.
The economist, who worked for 24 years at the Fed and was director of the body, criticized the US central bank for raising interest rates by 0.75 percentage point last week.
Below are the main excerpts from the interview.
What is your assessment of the Fed’s decision to raise rates by 0.75 percentage point?
It was likely a mistake within the Federal Reserve committee. The Fed is well behind the curve, started raising rates too late and should have been more aggressive earlier in this process.
But, as inflation is very high, which has already raised expectations for price indices, it had to act with force and raised the rate more than the Central Bank of Brazil on the same day.
Fed committee members work hard to set a gradual pace on the accommodative policy withdrawal and have committed to raising rates by 0.50 percentage point for two meetings.
However, two days before the end of the June meeting, it was expressed (off the record, that is, without revealing the source) to a single press: ‘Never mind, we will increase 0.75 percentage point’.
All this gradually erodes the credibility of the Federal Reserve chairman for future commitments.
In his assessment, there was a last-minute decision by Jerome Powell. Would he have panicked at being too far behind in the conduct of monetary policy?
Yup. Before going to 0.75 percentage point, it could have adopted another stance, by raising interest rates by 0.50 percentage point with the support of everyone on the committee and achieving the same result before the markets.
It could have issued a communiqué in which it would have pointed out that a higher increase would be needed at the next meeting.
With this monetary policy by the Fed, has it become inevitable that the US will enter a recession this year?
Yup. The recession will occur because inflation is a big problem that makes the job of monetary policy extremely complex.
How strong will the recession be in the short term?
I believe it will be light, it should start in the last quarter of this year and continue in the first quarter of 2023. It will not be serious, also because the private sector does not face so many imbalances and will be able to navigate well during this period.
The US GDP is expected to grow around 1.75% in 2022 and will be stable next year, impacted by the recession.
Do you believe the Fed’s projection that unemployment will rise from the current 3.6% to 4.1% in 2024?
The unemployment rate is expected to rise, and it wouldn’t be a surprise if it hits 6%.
The information is from the newspaper. The State of São Paulo.
Source: CNN Brasil
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