The opinion that the high inflation in the US could be countered by tightening monetary policy without slowing growth had begun to gain more acceptance in the US over the past year.

After her predictions US central bank (Fed) last Wednesday for an increase in inflation in 2025, this ideal scenario faded significantly, sending international markets into turmoil.

When the Fed began in 2022 the aggressive increase of interest ratesthe prevailing view among analysts was that the US economy would hardly avoid recession, based on the experience of similar inflationary periods in the past.

Root cause for him inflation in the world’s largest economy was, after all, the expansionary fiscal and monetary policy implemented during the pandemic, combined with shocks from energy and food price increases. That combination pushed inflation to 9.1% in June 2022, the highest level in nearly 40 years.

Based on economic theory and experience of previous decades, the rapid increase in interest rates – from 0.25% at the beginning of 2022 they jumped to 4.5% in December of the same year – was expected to reduce demand for investment and consumption and therefore the US economy would slow down greatly or fall into recession.

This assessment has not been verified. Despite the stormy rise in interest rates, US GDP will grow 2.5% in 2022, roughly the average growth in the US over the past decade. Given the time lag with which changes in interest rates affect economic activity, many analysts argued that a recession would arrive in 2023, even as the Fed continued to raise interest rates, reaching a high of 5.5% last year in July .

However, instead of degradation, the GDP increased by 2.9%, more than in 2022, while inflation (based on the consumer price index) was falling significantly to 6.5% in December 2022 and 3.4% in December 2023.

The ideal scenario began to prevail this year as growth in the US economy remained strong. According to the Fed’s forecast, GDP growth will rise to 2.5% in 2024 before falling slightly to 2.1% in 2025. Gains on the inflation front have not been significant this year, however. It may have eased after fluctuations, to 2.4% in September, but then rose in October (2.6%) and November (2.7%).

The Fed on Wednesday revised upward its inflation forecasts – to 2.4% in 2024 (from 2.3% in September) and even more in 2025 (2.5% instead of 2.1 %), opening the bag of Aeolus for the markets, as it was accompanied by forecasts for a significantly slower rate cut in 2025. After the cut of interest rates by a total of one percentage point since September this year, the Fed forecast a further cut of just half a point in 2025 to 3.9%, after previously forecasting a cut to 3.4%.

The change surprised investors, pushing the yield on the 10-year U.S. Treasury note up sharply to 4.57 percent and triggering a big sell-off in stocks and losses of about 3 percent in the main U.S. stock indexes on Wednesday. At the same time, the price of bitcoin fell below $100,000 and the price of gold declined.

The change in the inflation forecast is also partly linked to policy changes announced by US President-elect Donald Trump, who takes office on January 20.

Trump has favored imposing large tariff increases on US imports that would drive up prices. Fed Chairman Jerome Powell noted that some members of the Fed’s monetary policy committee had tried to predict the impact of the new administration’s measures, but he stressed that it was too early as no specific policy measures had been announced. .