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The Fed is closely watching several risks that could make its task of taming inflation more difficult, such as hyper-heat consumer demand that keeps some upward pressure on prices and the potential effects of geopolitical tensions in the Middle East on oil prices. But the US central bank is also paying close attention to whether Americans remain confident that inflation will eventually return to normal. This faith seems to be eroding. The University of Michigan’s latest consumer survey released on Friday showed that Americans’ long-term inflation expectations rose to 3.2% this month, the highest level since 2011. These perceptions may continue to worsen the longer it takes for the Fed to return inflation to its 2% target. Fed officials do not expect inflation to reach 2% until 2026, according to their latest economic forecast released in September. If there’s one thing that would make the Fed shiver in its shoes, it’s exacerbating inflation expectations. If we find that consumers or businesses are already starting to feel that the level of inflation in the long run… creeps, and if that’s their expectations, we have to move and we have to put that under control. Fed Chairman Rafael Bostic told Bloomberg earlier this month. If Americans lose confidence that inflation can return to normal at all, it would prompt the Fed to tighten monetary policy further by either raising interest rates or keeping them high for much longer than expected. We have now reached the eighteen-month mark, and it is hard to believe that it will take much longer.

Tension between prices and the Federal Reserve’s outlook

The Fed’s benchmark lending rate is currently at a 22-year high, and investors already expect the central bank to keep interest rates higher for longer. I’ve worked at the Fed for six years, and if inflation expectations rise and aren’t under control, the Fed will definitely move. This is the only thing that causes them difficulty sleeping at night. “They don’t lose their sleep because of recessions because they come and go, but they lose their sleep because of long-term inflation expectations that drift upwards. It is unclear whether inflation expectations will continue to deteriorate, and the Fed is looking at a wide range of surveys, not just University of Michigan surveys. But the university’s survey is one of the most closely watched by investors and economists. The Fed is particularly focused on long-term inflation expectations, and Fed Chairman Jerome Powell is keen to mention the state of Americans’ inflation perceptions at every press conference after officials set monetary policy (which happens eight times a year). During his last post-meeting press conference earlier this month after officials voted to keep interest rates steady, Powell said, “The long-term inflation outlook seems to remain well established.” But the clock is ticking, inflation is still well above 2%, and some economists believe the Fed’s latest mile of inflation battle may be the most difficult. A recent analysis by the bank on consumer views on inflation showed that “consumers today know enough about the Fed to recognize its policies as the most important factor behind the recent and expected future inflation decline.”

The Challenges of China’s Economic Downturn: Is Beijing Consulting US Officials?

While Federal Reserve Chairman Jerome Powell plans the next move by the most powerful central bank, he may want to consult with officials in Beijing. China slipped back into deflation in October. Admittedly, a slight decrease in the red zone has fallen by only 0.2% year-on-year. But students in Japan in the nineties will remember that it is better not to underestimate the importance of these turning points. As Chinese officials head to San Francisco, they can expect to be showered with questions about Beijing’s plans to avoid a prolonged deflationary situation. Arguably, since the late nineties, the Asia-Pacific Economic Cooperation (APEC) summit has been more concerned with China’s weakness than with its power. Arguably, the last time was in 1997 when the Asia-Pacific Economic Cooperation (APEC) circus uncovered its tents and manifestos in Vancouver. It was amid the chaos of Asia’s financial crisis, and it was a feverish spectacle. Surreal too. At the time, I was a young Washington-based reporter covering the Fed and the U.S. Treasury. I had just spent a week in Hong Kong, where the International Monetary Fund is holding its annual meeting. There, officials in the United States and the International Monetary Fund scrambled to prevent the unrest from spreading to Indonesia, South Korea, Thailand, and especially to China. The concern at the time was that Beijing might also devalue its currency. Officials fear this could trigger a new race to the bottom in terms of exchange rates. Countries such as Malaysia and the Philippines are also being pushed to the brink. This explains why then-Treasury Secretary Robert Rubin and his deputies Lawrence Summers and Timothy Geithner stopped a few days ago in Beijing to dissuade Chinese leader Jiang Zemin from throwing liquids onto the already burning financial fire.

The Impact of Interest Rate Increases: Towards an Economic Recession?

The Fed’s rate hike does not directly affect inflation. They produce higher interest rates in the long run which in turn slows down the economy. This reduces inflation. Long-term interest rates have already risen since the Fed first raised rates, but this is only the first step. So far, the economy has not responded. Quite the contrary: it has gone from strength to strength. If the Fed’s rate hike had any effect at all so far, this would certainly be very strange. The most likely explanation is that we are still waiting for the Fed’s rate hike to trigger any economic change. It usually takes at least a year for the Fed’s action to affect the economy, but it may take longer. We have now reached the eighteen-month mark, and it is hard to believe that it will take much longer. That’s why I think we’re going into recession. Hopefully it’s light, but there’s no special reason to believe it. I’m not worried about Joe Biden’s age or alleged unpopularity, but I’m certainly worried about a recession. The ruling party never wins an election if there is a recession in the first half of the election year. Just ask Jimmy Carter, John McCain, and Donald Trump. Perhaps the Fed needs to continue to prove that it is making progress in its historic battle against inflation.