Fed may raise US interest rates to 6.5%

Published May 22nd, 2023 - 01:41 GMT
Fed may raise US interest rates to 6.5%
Interest and inflation rates affect the value of the US dollar - Source: Shutterstock

Recession may be inevitable if Fed aims to curb inflation with higher US interest rates

ALBAWABA – The United States (US) Federal Reserve Board (Fed) may raise US interest rates to 6.5 percent to successfully curb inflation, Bloomberg reported on Monday.

A research paper, prepared by a number of economists and academics, presented at a policy forum conference in New York, Friday, at the University of Chicago Booth School of Business, said the Fed is bolstering an overly optimistic outlook, which may not be realistic.

The 55-page study was conducted by Brandeis University’s Stephen Cecchetti, JPMorgan Chase & Co.’s Michael Feroli, Deutsche Bank AG’s Peter Hooper, Columbia University’s Frederic Mishkin and New York University professor emeritus Kermit Schoenholtz.

“Our analysis casts doubt on the ability of the Fed to engineer a soft landing in which inflation returns to the 2% target by the end of 2025 without a mild recession,” they wrote.

According to Bloomberg, the paper entails computer-calculated models in which interest rates would peak at either 5.6, 6, or 6.5 percent in the second half of 2023.

The Fed has raised the interest rate by nearly five percent in just a little over a year.

Data published Friday, after the paper was written, showed the Fed’s preferred inflation measures unexpectedly accelerated in January, as reported by Bloomber.

The study examined 16 different episodes since 1950 in the US and several other large economies when the central bank tightened policy aggressively to cool prices. All of them were associated with a recession, the Bloomberg report stated.

“In the current circumstances… an ‘immaculate disinflation’ would be unprecedented,” they wrote.

Nonetheless, despite what was described as “overly-optimistic”, the study praised the Fed for abandoning gradualism and launching the series of aggressive hikes, as Bloomberg put it.

“Provided policymakers maintain a restrictive stance through 2023 and possibly beyond, the Fed appears on track to approach the 2% inflation target within a reasonable horizon,” they said.

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