Fed to signal more rate hikes ahead
Fed to signal more rate hikes ahead

Federal Reserve Chairman Jerome Powell bluntly warned in a speech last month that the central bank’s efforts to curb inflation by raising rates aggressively will “bring some pain.” On Wednesday, Americans got a better idea of ​​how much pain they could be suffering.

The Fed is expected to sharply raise short-term interest rates by three-quarters for the third day in a row at its latest meeting. Another hike of this magnitude would push rates (which have a big impact on consumer and business credit) to a range of 3% to 3.25%, the highest level in 14 years.

In another sign of the Fed’s growing concerns about inflation, it could also signal that it plans to raise rates by the end of the year by far more than forecast three months ago — and stay high for an extended period of time.

Economists expect Fed officials to forecast their benchmark interest rate could rise to 4% by the end of the year. They could also point to further growth in 2023, possibly as high as around 4.5%.

Short-term rates at this level will make a recession more likely next year as the cost of mortgages, auto loans and business credit will rise sharply. The Fed intends to slow growth by limiting wage growth and other inflationary pressures by cooling the still-resilient labor market. Still, there is a growing risk that the Fed could weaken the economy enough to cause a recession and lead to job losses.


Interest rates in the U.S. economy have not been as high as the Federal Reserve predicted since the 2008 financial crisis. The average fixed-rate mortgage rate topped 6% last week, the highest level in 14 years. Credit card borrowing costs are at their highest level since 1996, according to Bankrate.com.

Still, Powell and other Fed officials say the Fed is aiming for a so-called “soft landing,” through which it can slow growth enough to curb inflation but not trigger a recession.

However, the target looked even more distant last week after the government reported that inflation hit a painful 8.3% last year. To make matters worse, so-called core prices, which exclude the volatile grocery and energy categories, are rising much faster than expected.

The inflation report also documents how far inflation is spreading across the economy, complicating the Fed’s anti-inflation efforts. Inflation now appears to be increasingly driven by higher wages and steady consumer demand for spending, rather than the supply shortages that have 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. “They will try to achieve a soft landing. The problem is that there is little scope for doing that right now.”

At a news conference after the Fed’s meeting on Wednesday, Powell was unlikely to signal that the central bank will ease its credit crunch. Most economists expect the Fed to stop raising interest rates in early 2023. But for now, they expect Powell to reiterate his hawkish anti-inflation stance.

“Eventually it will be a hard landing,” said Kathy Bostjancic, an economist at Oxford Economics.

“He wouldn’t say that,” Bosjancic said. But speaking of the most recent Fed meeting in July, Powell raised hopes of finally pulling back on rate hikes, adding: “He also wants to make sure the market doesn’t get off the ground and recover. That was the case last time.”


In fact, investors responded by boosting stock prices and buying bonds, which lowered yields on securities such as the benchmark 10-year Treasury note. Higher stock prices and lower bond yields generally stimulate the economy — the opposite of what the Fed wants.

In a news conference earlier in June, Powell noted that three-quarters of a rate hike was an “unusually large one” and said “I don’t expect a move of this magnitude to be widespread.” But after a worrying inflation report in August, the Fed now seems almost certain to announce a third straight rate hike. A fourth such increase is also possible if future inflation figures do not improve.

The central bank has implemented the fastest series of rate hikes since the early 1980s. But some economists – and some Fed officials – don’t think they have to raise interest rates to levels that would actually limit borrowing and spending and slow growth.

Cleveland Fed President Loretta Mester, one of 12 officials who will vote on the Fed’s decision this week, said she sees the need to raise the central bank’s interest rates to “slightly higher than 4%” level. ”

“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 such as Mester sent stock prices sharply lower last month after Powell delivered a hawkish anti-inflation speech at an economic conference in Jackson Hole, Wyoming.

“Our responsibility to maintain price stability is unconditional,” Powell said at the time — a comment widely interpreted as the Fed will fight inflation, even if it means deep layoffs and a recession.

Many economists are confident that a recession and widespread layoffs will be required to curb rising prices. Research released earlier this month under the auspices of the Brookings Institution concluded that unemployment may 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, cooling inflation, according to a paper by Johns Hopkins University economist Lawrence Ball and two IMF economists.

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