FX.co ★ Fed is willing to tolerate recession in order to regain control of inflation

Fed officials have given the clearest signal that they are willing to tolerate a recession in order to regain control of inflation. It seems that they are finally taking active steps to catch up after being criticized for being too late in realizing the magnitude of the inflation problem in the US.

On Wednesday, the central bank raised interest rates by 75 basis points and announced a potential 1.25% increase before the end of the year. This is more hawkish than economists expected.

Growth forecasts were also cut, while unemployment forecasts were lifted. Fed Chairman Jerome Powell repeatedly spoke of the painful slowdown needed to contain price pressures at their highest levels since the 1980s.

Gold reacted brightly to this news.

Powell told reporters that soft landings are likely to decrease to the point where policies need to be tighter or more restrictive for a longer period. This assessment contrasts sharply with six months ago, when Fed officials first started raising rates from near zero and pointed to the strength of the economy as a positive. Now, officials are implicitly acknowledging through their pessimistic unemployment forecasts that demand will need to be cut at all levels of the economy as inflation has proven resilient and widespread. The median forecast among the 19 Fed officials is that unemployment will hit 4.4% next year and remain at that level through 2024. But this new level may still be too low as interest rates are likely to hit 4.4% this year and 4.6% in 2023, before falling to 3.9% in 2024.