It is expected that the US Federal Reserve (Fed) will raise its policy rate by another 0.75 percent at the upcoming Federal Open Market Committee (FOMC) meeting slated for July 26-27, 2022. The latest inflation figure for June hit a record four-decade high of 9.1 percent YoY, prompting the Fed to place more weight on the inflation risk. The likelihood that the Fed will raise its policy rate by 1.0 percent looks slimmer than a 0.75 percent rate hike at the upcoming FOMC meeting because it would be the steepest rate increase in more than four decades, thus triggering market jitters if the Fed did so. Additionally, markets would view that the Fed might be overly concerned about inflation and that inflation might not be manageable, hence prompting the Fed to implement a more aggressive rate hike than previously signaled. For this reason, the Fed may have to weigh the potential impact of its aggressive policy tightening drive.
Although the Fed is trying to direct the US economy towards a soft landing, accelerating inflation has left the Fed with fewer options other than to go ahead with its aggressive monetary policy tightening. Inevitably, the US economy could be heading for a technical recession or an economic contraction for two consecutive quarters during 2023. Meanwhile, the US economy has exhibited signs of cooling down as many companies have begun to cut jobs amid concerns about economic conditions, including inflation. Additionally, domestic consumption is set to slow down because of such concerns. We at KResearch are of the view that the US economy will likely experience a technical recession, i.e., a QoQ economic contraction for two consecutive quarters by early 2023 due primarily to the slowdown in domestic consumption. For this reason, we do not view that the potential US economic recession will be as severe as in 2009 while inflation is expected to decline somewhat in line with sagging demand, thus prompting the Fed to delay its policy rate hikes, going forward.