The Federal Reserve (Fed) had two possibilities before it at the July meeting, which concluded on Wednesday: a large increase in interest rates or an even higher Rise. Those responsible for the US central bank suggested an increase of 75 basis points, as they have finally decided, matching the rise of the previous call, but they have also analyzed a greater movement given the evidence that some indicators showed that the economy is still active and paying the ground for inflation. The signs have been ambivalent: in the face of a vigorous labor market, and a drop in the price of a barrel of crude oil during the last month except for the last two days, high inflation (9.1% in June) and the slowdown in the profits of the main corporations, including the technological ones.

Last month’s rise of 75 basis points was the biggest in nearly three decades, so officials at some regional reserves had been wary of a higher hike. In the end, caution has prevailed due to the implicit risk of triggering a recession with a higher rise. Markets were betting on this rise, with a residual probability of a one percentage point rise. The Fed statement justifies its decision on the fact that “recent spending and production indicators have softened”, but that “job gains have been solid” and “the unemployment rate has remained low”. The expected scenario is that the price of money reaches 3.4% by the end of the year.

The Fed’s decision has caused a strong rally in the euro, which traded at around $1.02, with the dollar losing almost 0.75%. Jerome Powell, chairman of the Fed, has assured that the central bank is moving “quickly” to deal with inflation and that the entity has the tools to do so. The meeting’s statement reiterates that “continued increases in the target range will be appropriate,” and that it will adjust its policy if risks emerge, such as those outlined Tuesday by the International Monetary Fund, that could frustrate its goals. The goal continues to be “the return of inflation to its 2% target”, but with the entity “very attentive to the risks” of it.

After the announcement of the fourth rate hike so far this year, Powell has not ruled out another “unusually high” increase in September if necessary, but, at the same time, he has healed himself by pointing out that, as monetary policy tightens, it would also be “appropriate” to slow down the rate of hikes to assess their cumulative effect on the economy. The head of the Fed, however, was convinced that the increase in the price of money does not have to cool down the economy too much. “We can avoid recession,” he has said. “We think it’s time to go from meeting to meeting.”

The three-quarter point rise in the target range for the fed funds rate currently raises the price of money to 2.25%-2.5%. With this, the accumulated increase between June and July is 150 basis points, the highest rise since the time of Paul Volcker in the early eighties. Nobody knows what will come next. The contracts of swaps (guarantee insurance to fix a certain interest) that refer to the dates of the next Fed meetings take for granted an increase of half a point in September and that the rate reaches a maximum of around 3.4% in December, followed by cuts in 2023.

High volatility has accompanied the Fed in advancing from a quarter-point increase in March, the first since 2017, to a half-point in May and three-quarters of a point in June, the largest increase since 1994. This week’s meeting was also expected to give an indication of how much higher the cost of borrowing will have to rise to restore price stability; that is, a roadmap that indicates, in addition to how much, when the cruising speed of the neutral rate will be reached -neither accommodating nor restrictive-, which is estimated at 2.5%. But, judging by Powell’s statements today, the unknown will persist until at least September.

While waiting to know the GDP data for the second quarter -the first was negative; two in a row in red fall into the technical definition of recession-, the economic slowdown is already noticeable and Walmart, the country’s largest private employer, amplified fears of recession on Monday by cutting its profit forecast, with a bump in its shares of the 7.60% this Tuesday. The large retail chain, a thermometer of the country’s economy, ensures that double-digit inflation “is affecting customers’ purchasing power.” Other giants such as CocaCola, the bank UBS and 3M have also seen their profits fall in the first half, up to 55% in the case of the last one. Retailers and banks, in addition to technology, have been the most affected by the lowering of forecasts.

The yield on two-year Treasury bonds, one of the public debt instruments closely linked to Fed policy, fell 2 basis points to around 3% on Tuesday, while the 10-year rate fell 6 basis points, at 2.73%. The gap between those two benchmark yields, a widely-watched gauge of growth expectations, posted the biggest reversal since 2000.

“At a minimum, we expect the Fed to announce another 75 basis point rate hike this week, and hint that a third 75 basis point rate hike may be needed in September,” Tiffany Wilding, PIMCO economist for North America. “Though [Christopher] Waller [de la junta de gobernadores de la Fed] downplayed the likelihood of a one percentage point hike in his recent comments, we believe the chances [de ese incremento] they are close to 50%”, speculated Wilding, who expects the Fed to review its forecasts and advance to 2022 the two increases planned for 2023.

Any analysis of the outlook is complicated by mixed economic data, specifically runaway inflation combined with signs of a slowdown. The behavior of the GDP in the second semester may serve as a guide in the face of ambivalent signals such as the drop in the price of crude oil, which takes exponentially longer to be reflected in the CPI than the rise, the slowdown in mortgages, an unemployment rate (3.6 %) bordering on full employment and sustained and lively consumption in food, restaurants and travel, compared to the retraction of spending on non-perishable goods. For a bird’s-eye view, experts say, the Fed would need a magic wand. The European Central Bank offered an example of caution last week when its President, Christine Lagarde, formally declined to comment on future actions. “We do not offer forward guidance of any kind,” she said. Just like her colleague Powell did this Wednesday.