Is The Fed At Risk Of Tipping US Economy Into Recession With Expected Rate Hike?

The Federal Reserve will soon announce whether it will raise interest rates as widely expected on Wednesday in a bid to combat inflation. But does the Fed risk tilting the U.S. economy into a recession just as the COVID-19 pandemic comes under control?

On Tuesday, a CNBC survey rated the probability of the U.S. entering a recession in the next year at 33% and a 50% chance for Europe. At issue was whether the soaring cost of commodities in the wake of Russia's invasion of Ukraine and supply chain disruptions from China would prompt the Fed to hike rates faster.

Though Fed Chairman Jerome Powell has committed to a gradualist approach to raising interest rates, there exists a chance that moving too fast could undo the economic growth seen last year and instigate a recession.

By all accounts, inflation is at historically high levels. The consumer price index (CPI) stands at 7.9% in its most recent reading, the highest it has been in decades, while the producer price index (PPI) for wholesale goods is 10% higher than it was last year. On top of this, the war in Ukraine has fueled both rises through the impact it has had on gas prices, which in some states is as high as $5 a gallon.

At the same time, supply chain disruptions remain acute. On Sunday, China initiated a COVID-19 lockdown in the city of Shenzhen, an important manufacturing hub, affecting international businesses including Apple. These delays, even if only for days, have ripple effects that leave a backlog of shipments that can last for weeks or months.

But is a recession inevitable?

According to the New York Times, acting now while bond yields are higher and before inflation begins entering the double digits range may ward off both chances of a recession or 1970s-style stagflation.

The increase in commodity prices may also not be a factor that would tip the Fed into recession. On March 3, Chairman Powell said the war in Ukraine was doing little to influence the central bank’s desire to raise rates though acknowledged the uncertainties it created for the market.

In that same address to the Senate Banking Committee, Powell also reiterated his gradualist approach to lifting rates. He promised that the amount the Fed would lift rates would remain dependent on how much it does, or does not, bring down inflation.