WASHINGTON (AFP) - US central bankers face an increasingly difficult balancing act as they struggle to douse scorching inflation while still keeping the economy growing, though they have made it clear they are willing to risk a recession.

But with war still raging in Ukraine and Covid-19 causing ongoing issues in Asia, avoiding an economic downturn will require luck and depend on many factors outside the United States Federal Reserve's control.

As American families struggle to make ends meet amid surging prices for gas, food and housing, Fed officials have made clear that fighting inflation is their top priority even if that means inflicting pain.

The Fed will hold its two-day policy meeting on July 26 to 27, when it is expected to hike the benchmark borrowing rate by another three-quarters of a percentage point in its aggressive campaign to cool demand and ease price pressures.

Despite a healthy job market with near-record low unemployment, workers are seeing their wage gains overwhelmed by consumer prices that rose by a new 40-year high of 9.1 per cent in June.

Slowing the economy is likely to cause more job losses, but policymakers want to avoid at all costs the greater pain of a price spiral that becomes entrenched or spins out of control.

Treasury Secretary Janet Yellen, herself a former Fed chief, has previously warned that such a soft landing will require good luck. On Sunday (July 24), she stressed again that while "growth is slowing", the data does not necessarily point to a recession.

"I am not saying that we will definitely avoid a recession, but I think there is a path that keeps the labour market strong and brings inflation down," she told NBC.

Aggressive rate hikes

Former Fed vice-chair Donald Kohn told AFP it was a "very complicated, multi-dimensional issue", especially due to the ongoing supply chain uncertainty.

After flooding the world's largest economy with support during the pandemic - zero interest rates and a steady stream of liquidity into the financial system - Fed policymakers were congratulating themselves on how quickly the economy recovered, regaining millions of jobs in a matter of months.

But they were caught flat-footed by the rapid run-up in prices as Americans, flush with cash due to massive government aid, went on a spending spree, buying up cars, houses and other goods at a time when the global supply chain was still bogged down by pandemic lockdowns that continue in China.

The Fed finally began lift-off - taking the policy interest rate off zero - in March, starting with a 25-basis point increase, followed by 50 in May and 75 in June.

Higher lending costs make it more expensive to borrow funds to buy cars and homes or expand businesses, which should cool demand, while also making it more attractive to save rather than spend.

Fed chair Jerome Powell last month said the policy-setting Federal Open Market Committee would consider a hike of either 50 or 75 basis points at the July meeting, and most economists expect a repeat of the June three-quarter-point increase.

Fed governor Christopher Waller recently floated the idea of a mammoth 100-basis point hike, which would be the first since the US central bank started using the federal funds rate for policy in the early 1990s.

The equivalent amount of tightening in a single move has not been seen since the early 1980s, when then Fed chief Paul Volcker was on a crusade to crush a wage-price inflationary spiral.

But even Mr Waller noted that it is important not to move too fast, and a full-point hike would be called for only if data continues to show accelerating price increases.

"I think they will probably discuss 100 basis points just because the inflation picture is still very bad," said Lafayette College economics professor Julie Smith.

But some recent data indicates that "previous rate increases have very likely started to work", she said in an interview.

Housing prices have skyrocketed, hitting new records repeatedly, even as interest rates have risen, and consumer spending continues to increase, leading some economists to warn of a contraction in the second quarter.

But there are signs of cracks, including falling home sales, a dramatic drop in mortgage applications and an increasing share of spending going to necessities.

Officials have said the US economy is strong enough to withstand higher rates without a serious downturn, but others, including former Treasury secretary Lawrence Summers, say they are overly optimistic and job losses will have to rise sharply in order to tame inflation.

Mr Kohn said it will be important for Mr Powell to communicate clearly about what data the Fed is looking for to slow or pause the rate hike cycle.

Mr Kohn thinks "a fairly shallow recession" with higher unemployment than the 3.7 per cent the Fed projected last month "will be necessary to break this inflation spiral".

"But, boy, the amount of uncertainty around it is just huge," he added.