WASHINGTON– Speaking at an economic conference in Jackson Hole, Wyoming last month, Federal Reserve Chair Jerome Powell issued a blunt warning: The Fed’s drive to curb inflation through aggressive rate hikes would “cause Americans some pain.” “, he said.
When the Fed finishes its final meeting on Wednesday and Powell holds a press briefing, Americans will likely get a better idea of just how much pain they could face.
The central bank is expected to hike its short-term interest rate by a substantial three-quarter point for the third straight month. Another hike that big would push interest rates – which affect much consumer and business credit – to a range of 3% to 3.25%, the highest level in 14 years.
However, many Fed watchers will pay particular attention to Powell’s words at a subsequent press conference. His comments will be analyzed for any indication as to whether the Fed expects to moderate its rate hikes in the coming months — or instead tighten further significantly until it is satisfied inflation is on the way down.
In another sign of the Fed’s growing concerns about inflation, it is likely to signal on Wednesday that it plans to hike rates by the end of the year much more than it forecast three months ago — and keep them higher for longer. Economists expect Fed officials to forecast their benchmark interest rate could rise as high as 4% before the new year. They’re also likely to signal further increases in 2023, perhaps up to around 4.5%.
Short-term interest rates at this level would make a recession more likely next year as the cost of mortgages, auto loans and business credit would rise sharply. The Fed intends these higher borrowing costs to slow growth by cooling a still-resilient labor market to limit wage growth and other inflationary pressures. Still, there is a growing risk that the Fed could weaken the economy enough to cause a downturn that would result in severe job losses.
The economy has not seen interest rates as high as the Fed is projecting since the 2008 financial crisis. Last week, the average fixed-rate mortgage rate topped 6%, its highest level in 14 years. Credit card borrowing costs are at their highest since 1996, according to Bankrate.com.
Powell and other Fed officials still say the Fed’s goal is to achieve a “soft landing,” through which they would slow the economy enough to tame inflation, but not so much as to trigger a recession .
However, last week that target looked further out of reach after the government reported that inflation was a painful 8.3% last year. Worse, so-called core prices, which exclude volatile food and energy costs, rose much faster than expected.
The Inflation Report also documented how far inflation has spread throughout the economy, making the Fed’s task more difficult. Inflation now appears to be fueled increasingly by higher wages and consumers’ steady appetite for spending, rather than the supply shortages that plagued the economy during the pandemic recession.
“They’re going to try to avoid a recession,” said William Dudley, former president of the Federal Reserve Bank of New York. “The problem is that the scope for this is practically non-existent at the moment.”
The Fed’s rapid rate hikes mirror steps being taken by other major central banks and add to concerns about a possible global recession. The European Central Bank raised its key interest rate by three quarters of a percentage point last week. The Bank of England, Reserve Bank of Australia and Bank of Canada have all made sharp rate hikes in recent weeks.
And in China, the world’s second largest economy, growth is already suffering from repeated government COVID lockdowns. If the recession grips most major economies, it could also derail the US economy.
At his press conference on Wednesday, Powell is unlikely to give any indication that the central bank will ease its credit tightening campaign. Most economists expect the Fed to stop raising interest rates in early 2023. But for now, they expect Powell to step up his hard-line anti-inflation stance.
“It’s going to be a hard landing at the end,” said Kathy Bostjancic, economist at Oxford Economics.
“He won’t say that,” said Bostjancic. But referring to the most recent Fed meeting in July, when Powell raised hopes of an eventual pullback in rate hikes, she added: “He also wants to make sure markets don’t get off and recover. That happened last time.”
In fact, investors responded by buoying stock prices and buying bonds, which lowered yields on securities such as the benchmark 10-year Treasury bond. Higher stock prices and lower bond yields generally stimulate the economy – the opposite of what the Fed wants.
The central bank has already implemented the fastest series of rate hikes since the early 1980s. But some economists — and some Fed officials — argue they have yet to raise rates to levels that would actually limit borrowing and spending and slow growth.
Loretta Mester, president of the Cleveland Federal Reserve Bank and one of the 12 officials who will vote on the Fed’s decision on Wednesday, said she believes it is necessary to raise the Fed’s interest rate to “just over 4% by early next year and to keep”. it there.”
“I don’t expect the Fed to cut rates next year,” Mester added, shattering the expectations of many Wall Street investors who had hoped for such a reversal. Comments like Mester’s contributed to a sharp fall in stock prices last month that began after Powell’s harsh anti-inflation speech at the Jackson Hole conference.
“Our responsibility to maintain price stability is unconditional,” Powell said at the time — a comment widely interpreted to mean that the Fed will fight inflation even if it requires heavy job losses and a recession.
Many economists sound confident that a recession and widespread layoffs will be needed to curb rising prices. Research released earlier this month under the auspices of the Brookings Institution concluded that unemployment might need to rise to 7.5% to bring inflation back to the Fed’s 2% target.
Only such a sharp downturn would reduce wage growth and consumer spending enough to cool inflation, according to a paper by Johns Hopkins University economist Laurence Ball and two International Monetary Fund economists.
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https://abc7.com/fed-interest-rate-decision-today-hike-federal-reserve-meeting-inflation/12246316/ Fed rate hike: The Federal Reserve is expected to hike interest rates at the September meeting