How much “pain”? Fed Announces More Upcoming Rate Hikes | Company

WASHINGTON — Federal Reserve Chairman Jerome Powell bluntly warned in a speech last month that the Fed’s drive to rein in inflation by aggressively raising interest rates “would cause pain.” Today, Americans may get a better sense of the pain that might be in store.

The Fed is expected to raise its short-term policy rate by a substantial three-quarters point for the third consecutive time at its last meeting. 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.

In a further sign of the Fed’s growing concern over inflation, it will also likely signal that it plans to raise rates much higher by the end of the year than it expected a while ago. three months – and to keep them higher for a longer period.

Economists expect Fed officials to project their key rate could reach 4% by the end of this 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 cost 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. Yet, the risk is growing that the Fed will weaken the economy to the point of causing a slowdown that would lead to job losses.

The US 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

Powell and other Fed officials still say the Fed’s goal is to achieve a so-called “soft landing,” whereby they would slow growth enough to bring inflation under control, but not to the point of triggering 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 the volatile food and energy categories, rose much faster than expected.

The Inflation Report also documented how far inflation has spread through the economy, complicating the Fed’s anti-inflation efforts. 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. “They’re going to try and pull off a soft landing. The problem is that the leeway to do that is virtually non-existent at this point.”

At a press conference he will give Wednesday after the end of the Fed meeting, Powell is unlikely to suggest 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 markets don’t drift away. and don’t straighten up. That’s what happened last time.”

Loretta Mester, president of the Cleveland Federal Reserve Bank, and one of 12 officials who will vote on the Fed’s decision this week, 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 investors on Wall Street who had hoped for such a turnaround. Comments like Mester’s contributed to a sharp drop in stock prices last month that began after Powell’s stern anti-inflation speech at an economics conference in Jackson Hole, Wyoming.

“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. Research 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.

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