The US Federal Reserve made no surprise
on its June policy meeting and raised interest rates by 0.75%, in the biggest
interest rate increase in nearly thirty years, after the expectations sharply
shifted towards more hawkish action following the release of May’s inflation
data, last week.

The prices continued to rise despite wide expectations that recent Fed
rate hikes would cause inflation to peak and start to ease inflationary pressures,
though the latest report showed inflation rose to the highest in more than four
decades, with signs that it could rise further and enter the double-digit

Inflation rose to 8.6% in May, the highest since early 1992, with the
value reflecting the current formula of calculating, but if it was calculated
the way it was done back in 1992, the level of inflation would have been over

Economists remain worried as the action of the central bank, which now
increased the pace in tightening its monetary policy to curb the worst
inflation in more than 40 years, so far does not give results.

Additional negative signals coming from the central bank’s downgrade of the
economic outlook, expecting growth to slow below the expected 1.7% rate in 2022
which divides analysts in views of the performance of the US economy.

The US central bank is expected to deliver another 0.75% rate increase
in the next meeting in July, but Fed Chair Jerome Powell said such moves would not be common, however, all possible scenarios
will remain on the table.

Some expect a scenario of the economy’s hard landing as rate hikes will
not give expected results in putting inflation under control but would slow
growth and push the economy into recession, while others expect that the
central bank’s actions will dampen inflation, although the growth will again
slow, it would lead to a so-called soft landing.

Powell expressed optimism regarding the central bank’s decision to raise
rates in a more aggressive manner, expecting that this will ease recession
risks and that the economy would emerge unharmed from the Fed’s action which
represents the sharpest policy tightening since 1994, although the expectations
that the economy will slide into recession, currently stand at the level above

This suggests that the US central bank, despite its current confidence, will have to strongly count on the
recession scenario, meaning that the policymakers will face strong signals of
reversing its action and probably bring rate cuts on their agenda in mid-2023
in case of rising recession risks.

The Fed is in a very difficult situation as it has been strongly
criticized for mishandling the monetary policy tools and being late in attempts
to curb inflation, with many analysts accusing the central bank of reacting too
slowly and delaying, according to them, more appropriate steps, in taming
inflation, once they had strong signals it may get unleashed and cause much
bigger damage to the economy that we see now.

The US policymakers are expected to
remain very cautious, as soaring inflation so far does not show signs of
peaking that would prompt the Fed for more aggressive steps in the near future,
despite a slightly calmer tone from chair Powell, with inflation reports in
coming months to be the main drivers of Fed’s action.

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