US and Europe can escape recession, says Fed official

The United States and Europe may escape the crisis transfer, according to a Fed official

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The United States and the European Union can escape recession while bringing inflation down to an acceptable level, a Federal Reserve (Fed) official said on Tuesday. a “soft landing” is achievable in these two economies. 

“A soft landing is possible in the United States and the European Union”, indicated the president of the Federal Reserve Bank of St. Louis, James Bullard, during a speech at New York University.

This requires that the “change” in monetary policy be “properly executed”, i.e. the passage from an accommodative policy during the pandemic to a firmer policy in the face of inflation.

A key element for this, he pointed out, is inflation expectations.

Indeed, if markets and consumers expect prices to remain on their upward trajectory, they will act accordingly: stores will continue to raise their prices, consumers will rush to buy before prices won't rise any higher, workers will demand higher wages, etc.

“Current inflation in the United States and the euro zone is close to the [double-digit] levels of the 1970s”, underlined James Bullard.

The fight against inflation, at the time, “cost dearly” to the American economy, with several periods of recession, but this was due, according to the official, to the fact that it “was not credible in the departure” given that “few people trusted the Fed to bring inflation down after letting it rise for a decade.”

Therefore, the then Fed Chairman, Paul Volcker, “had to gain credibility” by hitting hard.

But “the Fed and the ECB [European Central Bank] have considerable credibility compared to their counterparts of the 1970s”, further commented on the President of the Federal Reserve Bank of St. Louis.

“Inflation was stronger in the second quarter than I expected”; therefore, “we are going to have to go a little higher” than expected, he also said, CNBC reported.

The Fed's key rates, which set the tone for banks trade in the United States and are currently between 2.25 and 2.50%, will have to be raised to 3.75%-4% by the end of 2022, thus anticipated James Bullard.

Inflation in the United States reached 9.1% year on year in June, a record since 1981. In the euro zone too, it was propelled to a new record in July, at 8.9% on one year.