US Fed: The Scylla of doing too of too much little and Charybdis

It may be best to stay on guard over the economy's ability to bend without breaking as it enters a period of maximum danger

- RAGHURAM G. RAJAN

The US Federal Reserve is clearly determined to bring down inflation. But no one really knows how high it will have to raise its policy interest rate, and how long it will have to keep it there, to achieve its objective. Many are thus wondering whether the US Fed will bring on a recession.

Inflation is coming down, partly because snags in supply chains have been sorted out, but also because demand is weakening. Higher interest rates have slowed home purchases, and hence housing construction. Higher-priced goods and services have eaten into household budgets and impeded consumer spending. And China's anaemic growth has dampened commodity prices globally.

The Fed, however, is not satisfied with the current situation. It fears that until some slack emerges in America's red-hot labour market, wages could still catch up with inflation and then push it higher. The last thing the Fed wants is to hit pause and then see inflation ramp up again as financial markets celebrate and financial asset prices rise, reigniting demand. That would force policymakers to raise rates higher, and for longer. 'One and done' would be far better than 'rinse and repeat', both for the economy and the Fed's reputation.