Is recession the only way out of US inflation scourge?

Unemployment may have to rise sharply as the US Federal Reserve tries to slow the economy and choke off soaring inflation

A massive interest rate hike by the US Federal Reserve and promises of more to come are fueling warnings that the only offramp from the searing price hikes engulfing American families is a full-blown recession.

The Fed remains hopeful it can slow activity and demand, cooling the blistering pace of inflation, without derailing the world's largest economy. But skepticism is growing about the chances of success.

The super-sized rate increase came as the Fed faces intense pressure to curb soaring gas, food and housing prices that have left millions of Americans struggling to make ends meet and sent President Joe Biden's approval ratings plunging. 

Fed Chair Jerome Powell said a recession with job losses is not the goal, but bringing down inflation "expeditiously" is "essential" since that is vital to a healthy economy.

The Fed will need a Goldilocks scenario where "a number of things fall into place and at the right time," she told AFP.

In the wake of the Fed decision, mortgage rates rocketed to their highest level in 13 years, with the average for a 30-year, fixed rate home loan reaching 5.78 percent.

"My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing and transportation," Powell told reporters after the rate hike was announced.

- Higher unemployment -

The measure will "put a stop to shipping companies taking advantage of American families, farmers, ranchers and businesses and to bring down prices and give the American people a little bit of breathing room," he said at the White House.

The economy has continued to create jobs: the unemployment rate in May was 3.6 percent, just a tick above its pre-pandemic level, and there are nearly two job openings for every unemployment person, compared to 1.3 pre-Covid.

But he stressed that "events of the last few months have raised the degree of difficulty," and achieving a soft landing likely will "depend on factors that we don't control."

Even so, a half-point increase in the jobless rate can signal the start of a recession.

Steve Englander of Standard Chartered Bank and a former Fed economist said  the outcome will be "be painful, even if it's not a technical recession" -- usually defined as two quarters of negative growth. 

But Bostjancic said without tough action to contain prices, the US could face stagflation -- sluggish growth with high inflation -- last seen in the 1970s and 80s.

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Originally published as Is recession the only way out of US inflation scourge?