How the US fight against inflation could send Australia into recession?

Australia could face the prospect of getting caught up in a global recession after the US Federal Reserve increased his cash rate by 0.75 percent.

Scott Phillips, Motley Fool’s chief investment officer, said US cash interest rates will likely be “very close” to 4.5 percent by the end of the year, in an effort to tackle rising inflation.

“The real fear in the US is that this could trigger a recession, and the US Fed says they will do whatever it takes,” Phillips told Today.

Fears of a recession have led to a fall in the price of crude oil.
The US is raising its cash interest rates to fight inflation, which could trigger a recession. (AP)

“They won’t stop until they fix inflation. What that means is that if the US goes into recession, they’ll be the world’s largest consumer economy, and that’s bad news for the rest of the world, including Australia.

“I don’t want to scare people, but forewarned is pre-armed.”

Phillips said tariffs in Australia are likely to continue to rise, urging people to prepare ahead of time.

“The RBA wants us to stop spending, we can choose to do that or they can let us do that. This isn’t great for companies,” he said.

“They want inflation to fall and we’re only going to do that by putting away the wallet.”

He also gave some tips for average households – “do the boring stuff”.

“Move forward on your mortgage. Make sure you can accommodate those higher rates when they come, because they will come, and if you can’t trade now, prepare for what’s to come,” he said.

“The best idea is to start paying those higher rates now. Pay as if the rates have already gone up.

“They’ll tell you if you can do it. It also means you can make some sacrifices now and that will make the pain less painful when it finally happens.”

For sale sign at home
Mortgage holders must now prepare for the worst. (9News)

Today’s decision marks the Fed’s toughest policy move to fight inflation since the 1980s. It will also likely cause economic pain for millions of US businesses and households by driving up the cost of loans for things like homes, cars and credit cards.

Federal Reserve Chairman Jerome Powell acknowledged the economic pain this rapid tightening regime could cause.

“Nobody knows if this process will lead to a recession and, if so, how big that recession would be,” Powell said at a news conference after the central bank’s policy announcement, which followed a two-day meeting on monetary policy making.

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The updated summary of the Fed’s economic projections, released Wednesday, reflects that pain. The quarterly report showed a less optimistic outlook for economic growth and the labor market, with the median unemployment rate rising to 4.4 percent in 2023, higher than the 3.9 percent Fed officials forecast in June and significantly higher than the current rate of unemployment. 3.7 percent.

US gross domestic product, the main measure of economic output, was revised down to 0.2 percent in June, from 1.7 percent in June. That’s well below analysts’ estimates — Bank of America economists had estimated GDP would be revised to 0.7 percent.

Inflation forecasts also grew. Core spending on personal consumption, the Fed’s preferred measure of rising prices, is expected to be 4.5 percent this year and 3.1 percent in 2023, the Fed’s SEP found. That is higher than the June forecast of 4.3 percent and 2.7 percent respectively

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