December 8, 2022

Hardwood Paroxysm

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The Federal Reserve is set to raise its new maximum interest rate to stem the rush of inflation

The Federal Reserve begins raising new interest rates in an effort to stem the rush of inflation. Despite the five increases in the cost of money since the beginning of the year, prices have in fact remained at 40-year highs, forcing the central bank to continue its narrow roadmap for increases. At its next meeting on Wednesday, November 2, the Federal Reserve is expected to raise the cost of borrowing by 75 basis points, the fourth consecutive increase of that size. Further adjustments are scheduled in the coming months.

Goldman Sachs: 5% rates in March

According to Goldman Sachs, the central bank will raise interest rates by 50 basis points in December, and then adjust them by 25 basis points in February and March, when the cost of borrowing will reach 5%, a level higher than previously estimated. In the face of the hawkish Fed, fears of a possible US recession have multiplied in the context of deep global uncertainty between geopolitical tensions and the war in Ukraine.

The dollar’s strength is also of concern: With the Fed’s increases, the US currency has strengthened against major currencies, complicating the fight against inflation by other central banks, driving up US corporate profits by $10 billion in the third quarter alone.

The Federal Reserve, like other major central banks, is engaged in a delicate balancing act: on the one hand, the fierce battle against inflation and on the other, preventing the battle from unleashing a new set of threats, including dangerous financial instability. Central bankers know that in the absence of strong price action now, the risk is that they will have to move forward with more force later on.

Recession risks

But as interest rates rise, so does the risk of a recession. In short, the Fed and other central banks are putting themselves at risk if they do not raise interest rates enough, and if they raise them too much. The first risk is financial stability at a time when markets are particularly volatile, as evidenced by the tensions in UK pension funds. The work of central institutions is also complicated by governments that, in an effort to ease the cost of energy and the cost of living for families, risk moving in the opposite direction to those of central banks with dire consequences.