Fed prepares to raise interest rates amid unexpected rise in US inflation

The Fed’s decision will come at a time of widespread concern that a return to more aggressive fiscal policy could trigger a recession in the world’s largest economy.

The US Federal Reserve (Fed) is preparing to raise interest rates on Wednesday in a meeting that raised expectations due to the possibility that a 0.75% hike could be announced, as the specialized media suggested, given the unexpected rise in inflation in May.

A few days ago, the Bureau of Labor Statistics revealed that the consumer price index had climbed to 8.6% last month, the highest figure in the last 40 years and slightly above analysts’ expectations, especially after inflation recorded its first drop in 7 months in April.

So even though the Fed originally planned to gradually raise interest rates in half-point increments, Newspapers like The Wall Street Journal do not rule out that the central bank opts for a more aggressive fiscal policy and raises rates by 0.75 points this Wednesday.

Ending inflation is “the main economic priority” of the government of Joe Bidenas the president has repeatedly said, attributing the price hike mainly to the invasion of Ukraine ordered by the Russian president, Vladimir Poutine.

While rising energy costs have been the main driver of inflation in recent months, the Fed’s accommodative monetary policy to spur the post-pandemic recovery has generated a very robust labor market, which also has an effect on price increases.

The unemployment rate in May it was at 3.6%, at a level of almost full employment.

Thus, companies are forced to increase wages to attract new workers, which increases the purchasing power of consumers and this increases the prices of food, energy and rents, among others.

The Federal Reserve raised rates for the first time since 2018 last March, by 0.25 points; an increase which was followed by another in May, of 0.5 points.

Since then, U.S. central bank leaders have repeatedly indicated that further half-point hikes are on the table, but a 0.75 hike is something that so far hasn’t been. didn’t even get into the debate.

The Fed’s decision will come at some point widespread fear that a return to more aggressive fiscal policy could trigger a recession in the world’s largest economy.

The US economy contracted 0.4% in the first quarter of the year, for the first time since mid-2020, after which the White House for the first time acknowledged the possibility of the country entering a recession. .

Traditionally, an economy is considered to have entered a recession when it has experienced two consecutive quarters of contraction.

On Tuesday, Wall Street opened in the green and the Dow Jones Industrial Average rose 0.53%, in an apparent attempt by the market to recoup some of Monday’s steep declines that pushed the S&P 500 back into the bear market. ).

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