High inflation, Fed rate hikes leave mark on US economy in 2022

By Ovunc Kutlu

ISTANBUL (AA) - Record inflation and the US Federal Reserve's aggressive rate hikes left their mark on the American economy in 2022.

The Fed and Chair Jerome Powell had repeatedly said in 2021 that inflation was "transitory" before debunking that myth late last year and signaling a monetary tightening cycle.

Although analysts thought the Federal Open Market Committee (FOMC) was too late to shift course to tame inflation, most economists did not anticipate rate hikes would come so fast and so steep.

The US central bank had said in its March 2021 meeting that inflation continues to run below its target of 2% but the following month said: "Inflation has risen, largely reflecting transitory factors."

Powell, in July 2021, had said inflation increased "notably" and it will "likely remain elevated in coming months before moderating," however, it was Dec. 1, 2021, in testimony before Congress, that he said it is time to stop describing inflation as "transitory." The word was finally dropped by the FOMC two weeks later in a monetary policy meeting.

At the FOMC's March meeting, the Fed began its monetary tightening cycle with an interest rate increase of 25 basis points, followed by a hike of 50 basis points in May.

- Behind the curve in inflation fight

Despite the rate increases, consumer and producer inflation figures continued to climb in the US, raising concerns that the central bank was already behind the curve in its fight against inflation.

Producer prices soared to an annual gain of 11.6% in March, while consumer prices jumped 9.1% in June on an annual basis -- both recording their highest levels in more than 40 years.

The record figures forced the Fed's hand to make more desperate moves -- using its most powerful weapon -- more aggressive rate hikes.

The Fed increased its benchmark interest rate by 75 basis points June 15 -- its steepest rate hike in 28 years.

From June through November, the FOMC made four consecutive interest rate increases of 75 basis points, followed by another of 50 basis points Dec. 14, carrying the target range for the federal funds rate to between 4.25% and 4.5% -- its highest in 15 years.

- No end in sight?

It is, however, unclear when the FOMC would decide to pull its foot off the throttle and slow the pace and intensity of rate hikes.

Powell said Nov. 2 that there are "some ways to go" with rate hikes and the "ultimate level" of interest rates will be higher than previously expected.

The chair, in his last post-meeting news conference, said that more macroeconomic data is needed to prove inflation is falling. "It will take substantially more evidence to give confidence that inflation is on a sustained downward path," he said, as price pressures "remain evident."

He, however, admitted that the American economy slowed from last year, while job vacancies remained high and wage growth elevated.

- Recession worries

The Fed's aggressive monetary tightening, on the other hand, has been decreasing the money supply in the markets and the US and global economy in general.

The amount of liquidity declining in the markets has been so rapid and so steep that there have been fears of a recession in the world's biggest economy, which could also spill over to the global economy next year.

Although the Fed is trying to avoid triggering a recession with its rate hikes and achieve a soft landing, even Powell admits that the process would not be easy and the runway is getting shorter.

The International Monetary Fund said in October that recession fears have grown as central banks have strongly shown their resolve to fight record inflation, and warned that a sharp tightening of financial conditions could send the global economy into recession in 2023.

The IMF recently lowered its global economic growth forecast for 2023 to 2.7%, down 0.2 percentage points from its previous forecast, while it said there is a 25% probability that the global economic growth in 2023 could fall below 2%.

US economic growth for in third quarter came in at 3.2%, according to the Commerce Department’s third and final reading released last week.

The American economy contracted at an annual rate of 0.6% in the second quarter, after shrinking 1.6% in the first quarter of 2022, year-on-year.