"Increase in risk": why a sharp increase in the Fed rate may threaten the US economy

The US Federal Reserve raised interest rates by 75 basis points at once, to 3.75-4% per annum, the highest level since January 2008.

The Fed's Open Market Committee explained its decision by the need to curb the rise in consumer prices in the country.

“Inflation remains elevated, reflecting the imbalance in supply and demand caused by the pandemic, rising food and energy prices, and other price pressures… The Committee believes it is appropriate to continue raising the rate so that monetary policy becomes sufficiently restrictive for inflation to return towards the 2% target,” the Fed said in a press release.

In the future, the Fed may raise interest rates even more than originally expected.

This was announced during a press conference by the chairman of the US regulator, Jerome Powell.

“Incoming data ... from the report on the labor market and especially from the report on the consumer price index indicate that we can move to higher levels (of interest rates. -

) than we thought at the meeting in September,” TASS quotes the words Powell.

According to market participants, the Fed may again raise its discount rate in December - up to 4.25-4.5% per annum.

According to the Chicago Mercantile Exchange CME Group, investors estimate the probability of such a decision at 56%.

Note that in 2022, the Fed is raising the rate for the sixth time, although before that it had been holding it near zero for several years.

As experts interviewed by RT explain, due to such a sharp tightening of monetary policy, the regulator is trying to contain accelerated inflation.

According to the United States Department of Labor, in June 2022, consumer prices for goods and services in the country rose by an average of 9.1% compared to the same level in 2021.

The last time such an indicator could be observed back in 1981.

By the beginning of October, the annual inflation rate in the US dropped to 8.2%, but still turned out to be higher than analysts initially assumed.

Such data is provided by the Trading Economics portal.

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As Natalia Milchakova, a leading analyst at Freedom Finance Global, said, inflation in the United States began to accelerate back in 2021.

Then, the Fed experts called the consequences of the COVID-19 pandemic as the main reason for the price increase.

Thus, quarantine restrictions led to interruptions in the supply of components, components, raw materials and materials, which ultimately resulted in a rise in the cost of a number of goods.

Meanwhile, the actions of the Fed itself also played a serious role in accelerating inflation, Milchakova emphasized.

“During the fight against the coronavirus and its consequences, the United States and a number of other Western countries have printed a huge amount of money.

These funds were distributed by the authorities to the population as a measure of support.

As a result, the swollen money supply was not provided with goods in sufficient quantities, which affected prices, ”the interlocutor of RT explained.

According to her, in 2022, the situation was further aggravated by large-scale Western sanctions against Moscow.

Restrictions on the supply of Russian hydrocarbons provoked a shortage of raw materials, resulting in a marked increase in fuel prices.

“Along with the rise in energy prices, global food inflation began to grow.

This happened due to the interconnectedness of markets - the rise in prices for raw materials and fuel leads to an increase in the cost of finished goods, including food," added Natalya Milchakova.

Expenditure item

In theory, the Fed's policy should lead to an increase in interest rates on loans and bank deposits in the US, which will lead to a weakening of business and consumer activity, but will help contain further price increases.

However, in practice, the actions of the American regulator risk turning into a serious challenge for the country's business and financial system, analysts say.

As Georgy Svirin, a specialist in international financial markets at the Finmir marketplace, explained to RT, amid rising interest rates, companies will have to pay increased coupons on their debts.

This, in turn, can lead to an increase in the number of delinquencies and defaults.

“This situation is related to the issuance of a large number of bonds in previous years, when the market was almost zero rate.

Money could be borrowed from the regulator, earn interest on them and return the same amount.

During the pandemic, this served as a good incentive for economic recovery, but such a practice had to be ended before a sharp rise in rates, ”said Svirin.

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In addition to business, the American government will also have to seriously increase its expenses, experts are sure.

Thus, as a result of an increase in the interest rate, the cost of servicing the US government debt will also increase, the volume of which the US Treasury now estimates at $31.2 trillion.

It should be noted that in 2021 the United States sent about $352 billion to pay interest on public debt, and in 2022 the corresponding figure could rise to $399 billion. Such estimates were published back in May by the US Congressional Budget Office.

According to agency estimates, over the next seven years, the annual spending of the American treasury on servicing the public debt could more than double (to $ 925 billion) and exceed the country's defense spending ($ 924 billion).

However, against the backdrop of inflation and higher rates, the States will have to send even more money to pay off the debt than expected, according to experts from the American Peter Peterson Foundation.

“In the next ten years, interest costs alone (on public debt. -

) will amount to more than $ 8 trillion, eating up more of our budget than ever.

The economy will be damaged and we will be less able to address the country's priorities,” said Michael Peterson, head of the fund.

A similar point of view is shared by BitRiver financial analyst Vladislav Antonov.

In his opinion, in the future, servicing the public debt may become the largest item of expenditure for the US budget.

“At a rate of 5%, servicing the public debt annually would cost Americans more than $1 trillion.

However, as we can see, the United States is not very concerned about this yet.

They believe that if the dollar is the reserve currency, then they are allowed to do anything.

Apparently, the problems of the current authorities of the United States will be solved by another generation, ”Antonov said in a conversation with RT.

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Momentum for recession

Tightening monetary policy may also threaten the US economy as a whole, according to experts from the United Nations Conference on Trade and Development (UNCTAD).

According to experts, over the past ten years, the central banks of developed countries have kept interest rates "at an ultra-low level", but have not been able to achieve a qualitative growth of their economies.

Now regulators have to raise rates in order to contain prices, but this is fraught with a new global crisis, the authors of the report say.

“Changes in the monetary and fiscal policies of advanced economies could push the world into a global recession and prolonged stagnation, hurting more than the financial crisis of 2008 and COVID-19 in 2020,” UNCTAD said.

It is noteworthy that from January to March 2022, the volume of US GDP decreased by 1.6% compared to the same period in 2021, and from April to July, the indicator sank by an additional 0.6%.

This is evidenced by data from the Bureau of Economic Analysis of the United States Department of Commerce.

Traditionally, the reduction of the country's GDP for two quarters in a row is considered to be the beginning of a technical recession.

It is noteworthy that the American authorities have repeatedly ruled out such a development of events.

Meanwhile, in October, US President Joe Biden nevertheless acknowledged the possibility of a recession, but noted that he did not expect such a scenario.

“I don't think there will be a recession.

If it does, it will be a very minor recession.

That is, we will decrease a little, ”CNN quotes Biden as saying.

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Although from August to September the American economy really stopped the decline and added 2.6%, in the second half of autumn, the decline nevertheless resumed.

This conclusion was made by analysts of the American company S&P Global.

According to the organization, in October the composite index of business activity (PMI) in the US manufacturing and services sector fell to 47.3 points.

For four months now, the indicator has been continuously below the critical level of 50 points.

This situation traditionally indicates negative trends in the economy.

“In October, the economic downturn in the US gained significant momentum.

At the same time, confidence about the future prospects has sharply declined ... The data of the slices indicate an increase in the risk of contraction in the economy in the fourth quarter, while inflation pressures remain at a stubbornly high level, ”said Chris Williamson, chief economist at S&P Global.

Similar concerns are shared by many business people in the US.

According to the American Duke University, almost half (46.9%) of the surveyed financial directors of large companies are pessimistic about the future prospects for the economy in the United States, and about a third (30.3%) predict a serious decline in the country's GDP in the next 12 months.

Earlier, the American businessman Elon Musk also warned about the threat of a recession in the United States.

According to him, the economic downturn in the United States is inevitable and could last more than a year.

“This is just my guess, but perhaps (the economy will shrink. -

) until the spring of 2024,” the businessman believes.