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Where Are the U.S. and European Economies Headed?

Inflation will subside, but uncertainty remains high.

By Dana Bodnar | October 27, 2022 at 08:09 AM
Horizontal illustration of Flags of United States of America and European Union hanging on poles, waving in the wind in different directions. Credit: alexx_60/Adobe Stock

Following roughly 18 months of prices rising at unprecedented rates, inflation remains stubbornly high in both the United States and the Eurozone.  The U.S. Federal Reserve and the European Central Bank (ECB) have sought to aggressively increase interest rates in order to tighten the global money supply and bring prices under control.

These moves started to have an effect on inflation in the United States by mid-summer, although consumers’ economic outlook was generally pessimistic. In July, following the Federal Reserve’s decision to raise rates by 75 basis points (bps), the consumer price index experienced its first month of negative growth since May 2020. For consumers, this marked the first time in 26 months that goods, in general, did not cost more than they had the month before.

Since July, the Fed has undertaken additional ambitious interest rate hikes, which have had a small impact on inflation while introducing significant challenges for the U.S. economy. Thus far in 2022, the Fed has increased rates by 300 bps, with the target federal funds rate now between 3.00 percent and 3.25 percent. These hikes have been historically aggressive—rather than raising rates using its “typical” 25 bps jumps, the increases in June, July, and September were all 75 bps. Following disappointing inflation figures in September, we expect another 75 bps hike at the Fed’s November meeting and at least 50 bps in December.

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