High inflation in sight, Fed announces further rate hikes ahead

WASHINGTON (AP) — Last month, when Federal Reserve Chairman Jerome Powell spoke at an economic conference in Jackson Hole, Wyoming, he issued a stark warning: the Fed’s will to rein in inflation by aggressively raising interest rates, he said, would “bring a little pain” for Americans.

When the Fed wraps up its final meeting on Wednesday and Powell holds a press conference, Americans will likely have a better sense of the pain that may be in store.

The central bank is expected to raise its short-term policy rate by a substantial three-quarters of a point for the third consecutive time. Another such big hike would take its benchmark rate – which affects many consumer and business loans – to a range of 3% to 3.25%, the highest level in 14 years.

However, many Fed watchers will pay close attention to Powell’s words at a press conference afterwards. His remarks will be analyzed for any hints as to whether the Fed plans to moderate its rate hikes in the coming months — or continue to tighten credit significantly until it is satisfied that inflation is down.

In a further sign of the Fed’s deepening concerns about inflation, it will also likely signal on Wednesday that it plans to raise rates by the end of the year from what it had forecast a while ago. three months – and keep them higher for longer. Economists expect Fed officials to expect their key rate to rise as high as 4% before the new year. They are also likely to report further increases in 2023, perhaps up to around 4.5%.

Short-term rates at this level would make a recession more likely next year by sharply increasing the costs of mortgages, auto loans and business loans. The Fed intends that these higher borrowing costs will slow growth by cooling a still-robust labor market to limit wage growth and other inflationary pressures. However, the risk is growing that the Fed will weaken the economy to the point of causing a slowdown that would lead to heavy job losses.

The economy hasn’t seen rates as high as the Fed predicted since before the 2008 financial crisis. Last week, the average fixed mortgage rate rose above 6%, its highest level in 14 years. Credit card borrowing costs have reached their highest level since 1996, according to Bankrate.com.

Powell and other Fed officials still say the Fed’s goal is to achieve a “soft landing,” whereby they would slow the economy enough to bring inflation under control, but not so much as to trigger a recession.

Last week, however, that target appeared even further out of reach after the government announced that inflation over the past year was 8.3%. Worse still, so-called core prices, which exclude volatile food and energy costs, have risen much faster than expected.

The Inflation Report also documented how far inflation has spread through the economy, making it difficult for the Fed. Inflation now appears increasingly fueled by higher wages and consumers’ constant desire to spend and less by the supply shortages that had plagued the economy during the pandemic recession.

“They’re going to try to avoid the recession,” said William Dudley, former president of the Federal Reserve Bank of New York. “The problem is that the leeway to do so is virtually non-existent at this point.”

The Fed’s rapid rate hikes mirror actions taken by other major central banks, contributing to concerns about a possible global recession. The European Central Bank last week raised its key interest rate by three-quarters of a percentage point. The Bank of England, the Reserve Bank of Australia and the Bank of Canada have all made big rate hikes in recent weeks.

And in China, the world’s second largest economy, growth is already suffering from repeated government blockages. If the recession sweeps through most major economies, it could also derail the US economy.

At his press conference on Wednesday, Powell is unlikely to hint that the central bank will ease its credit crunch campaign. Most economists expect the Fed to stop raising rates in early 2023. But for now, they expect Powell to reinforce his tough anti-inflationary stance.

“It’s going to end up being a hard landing,” said Kathy Bostjancic, an economist at Oxford Economics.

“He’s not going to say that,” Bostjancic said. But, referring to the Fed’s last meeting in July, when Powell raised hopes of a possible pullback in rate hikes, she added: “He also wants to make sure the markets don’t come at you. rally in. That’s what happened last time.

Indeed, investors then reacted by driving up stock prices and buying bonds, which drove down rates on securities like the benchmark 10-year Treasury. Rising stock prices and falling bond yields generally stimulate the economy – the opposite of what the Fed wants.

The central bank has already embarked on the fastest round of rate hikes since the early 1980s. Still, some economists — and some Fed officials — say they have yet to raise rates to a level that would actually limit borrowing and spending and slow growth.

Loretta Mester, president of the Cleveland Federal Reserve Bank, and one of 12 officials who will vote on the Fed’s decision on Wednesday, said she thinks it will be necessary to raise the Fed’s rate to “a slightly above 4% at the start of next year and hold it there.”

“I don’t expect the Fed to cut” rates next year, Mester added, dispelling the expectations of many Wall Street investors who had hoped for such a reversal. Comments like Mester’s contributed to a sharp drop in stock prices last month that began after Powell’s stern anti-inflation speech at the Jackson Hole conference.

“Our responsibility to ensure price stability is unconditional, Powell said then – a remark widely interpreted to mean that the Fed will fight inflation even if it requires heavy job losses and a recession.

Many economists seem convinced that a recession and widespread layoffs will be needed to slow the rise in prices. A study released earlier this month under the auspices of the Brookings Institution concluded that unemployment may need to reach 7.5% to bring inflation back to the Fed’s 2% target.

According to an article by Johns Hopkins University economist Laurence Ball and two economists from the International Monetary Fund, only such a severe slowdown would reduce wage growth and consumer spending enough to calm inflation.

Comments are closed.