Fed set for another big rate hike with economy on knife's edge

WASHINGTON, July 24, (AFP): US central bankers face an increasingly difficult balancing act as they struggle to douse scorching inflation while still keeping the economy growing, though they have made it clear they are willing to risk a recession.
But with war still raging in Ukraine, and Covid-19 causing ongoing issues in Asia, avoiding an economic downturn will require luck and depend on many factors outside the Federal Reserve's control.
As families struggle to make ends meet amid surging prices for gas, food and housing, and a rising number of Americans take on second jobs to pay the bills, Fed officials have made it clear that fighting inflation is their top priority even if that means inflicting pain.
The Fed holds its two-day policy meeting next week, where it is expected to hike the benchmark borrowing rate on Wednesday by another three-quarters of a percentage point in its aggressive campaign to cool demand and ease price pressures.
Despite a healthy job market with near-record low unemployment, workers are seeing their wage gains overwhelmed by sky-high consumer prices that rose by a new 40-year high of 9.1 percent in June.
Slowing the economy is likely to cause more job losses, but policymakers want to avoid at all costs the greater pain of a price spiral that becomes entrenched or spins out of control.
Treasury Secretary Janet Yellen, herself a former Fed chief, warned last week that achieving a "soft landing... will require skill and good luck."
Former Fed vice chair Donald Kohn agreed.
"It's a very complicated, multi-dimensional issue," Kohn told AFP, especially due to the ongoing supply chain uncertainty.
After flooding the world's largest economy with support during the pandemic -
" zero interest rates and a steady stream of liquidity into the financial system-Fed policymakers were congratulating themselves on how quickly the economy recovered, regaining millions of jobs in a matter of months.
But they were caught flat-footed by the rapid run-up in prices, as Americans flush with cash due to massive government aid went on a spending spree, buying up cars, houses and other goods at a time when the global supply chain was still bogged down by pandemic lockdowns that continue in China.
The Fed finally began liftoff-taking the policy interest rate off zero-in March, starting with a 25-basis-point increase, followed by 50 in May and 75 in June.