US Federal Reserve Decision Could Cause a Recession: Motley Fool, Stephen Jones

Australians are being told they are “preparing” for further financial pain, including a potential recession, after the US Federal Reserve raised interest rates to the highest levels since the global financial crisis.

The central bank raised the country’s cash interest rate by three-quarters of a percentage point to 3.25 percent, and said further rate hikes will happen before the end of the year.

By December, the rate could reach nearly 4.5 percent in a bid to contain mounting inflation — currently 8 percent.

The decision marks the Fed’s toughest policy move since the 1980s and could lead to a recession.

Scott Phillips, Motley Fool’s chief investment officer, said the battle would trickle down to the average Australian, who was already battling inflation at 6.1 and eyeing even more interest rate hikes.

“The real fear in the US is that this could well cause a recession, and the US Fed says they will do what it takes — they won’t stop until they fix inflation,” he told Nine Network.

“If the US goes into recession, it will be the largest consumer economy in the world, and that’s bad news for the rest of the world, including Australia.

“I don’t want to scare people, but being warned is a harbinger.

“Rates will probably go up here as well.”

Fed Chair Jerome Powell said on Wednesday that it is still possible for the US central bank to avoid a recession, but that it is becoming less likely.

“If price stability is not restored, that would lead to more pain later on,” Powell said.

Mr Phillips said mortgage holders should try to anticipate possible future pain by paying off their loan as quickly as possible.

However, CommSec chief economist Craig James said it was still possible for Australia to avoid a recession.

“If people can keep their jobs and keep spending, the greater the chance of slowdown, not closure,” James said.

“But 1994 shows that the aggressive pace of rate hikes is not in itself something to fear.

“CBA Group economists expect the Australian economy’s annual growth rate, measured by GDP, to slow from 3.8 percent in 2022 to 1.4 percent in 2023.

“We expect the strong labor market, excess consumer savings and a long pipeline of housing construction to support economic activity, along with solid non-mining investment, massive agricultural output, strong demand for energy exports and robust government spending.”

Assistant Treasurer Stephen Jones acknowledged that the Fed decision would put further pressure on family budgets.

He said the Australian economy was not immune to international pressure.

Supply chain restrictions due to ongoing Covid-19 lockdowns in China, coupled with the war in Ukraine that pushed up commodity and energy prices, also fueled inflation and put pressure on budgets.

“There is no doubt that everything that happens in the US has an impact on us; this is the largest economy in the world,” Mr. Jones told ABC Radio.

“If they start moving their rates, it will have an impact on ours; it has an impact on our currency.”

Treasurer Jim Chalmers is due to hand over his first budget since Labor formed the government next month, and he signaled earlier this week that there had been a temporary increase in budget results.

The $50 billion improvement is due to high commodity prices, but does not eliminate the need for fiscal prudence.

“We expect there will be issues down the line; we know this is coming our way,” said Mr. Jones.

“It is now more important than ever that we address the issues and that we have a responsible budget that does not contribute to the $1 trillion debt.”

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