A recession in the United States is “a risk when the Fed (the American central bank, editor’s note) tightens its monetary policy in the face of inflation”, declared the Minister of Economy and Finance of Joe Biden, on the chain CNN.
“So that’s obviously a risk that we’re monitoring,” she added, but “we have a strong labor market, and I believe it’s possible to keep it that way.”
Faced with inflation which had reached its highest level in 40 years in June, before slowing down a little in July (8.5%), the central bank is gradually raising its key rates in order to slow down economic activity and ease the price pressure.
These policy rates set the tone for commercial banks for the interest rates on loans they offer to their retail and business customers. Higher rates therefore mechanically reduce consumption and investment.
“Inflation is much too high and it is essential to reduce it”, hammered Janet Yellen.
The Fed hopes for a “soft landing”, that is to say bring inflation back to its target of 2%, without plunging the economy into recession, which would cause a surge in unemployment.
“I believe there is a way to get there. (…) In the longer term, we cannot have a solid labor market without inflation under control,” said the minister.
While the world’s largest economy’s GDP contracted in the first two quarters of 2022, fitting the classic definition of a recession, she again asserted that was not the case.
“We are not in a recession. The labor market is exceptionally strong. (…) There are nearly two vacancies for every worker looking for a job,” assured Janet Yellen.
The job market remains very tense with a significant shortage of manpower. The unemployment rate, however, rose a little in August, to 3.7%, in particular as the participation rate rose, a sign that many workers left on the side of the road because of Covid, are returning to the market.