How much ‘pain’? Fed to signal more rate hikes ahead

Federal Reserve Chairman Jerome H. Powell blunt warning In a speech last month, the Fed’s efforts to curb inflation by raising interest rates sharply will “bring some pain.” On Wednesday, Americans may have a better idea of ​​just how much pain there could be.

The Fed is expected to raise key short-term interest rates by three-quarters of a point at its latest meeting third time in a rowAnother hike of this magnitude would lift the benchmark rate, which affects many consumer and business loans, to a range of 3% to 3.25%, the highest level in 14 years.

In another sign of deepening inflation concerns, the Fed may also signal that it plans to raise interest rates by the end of the year to levels much higher than forecast three months ago — and for a longer period of time maintain a high level.

Economists expect Fed officials to forecast their key interest rate could be as high as 4% by the end of the year. They could also herald additional growth in 2023, possibly as high as around 4.5%.

Short-term rates at that level would make a recession more likely next year Raise the cost of mortgages, auto loans and business loans. The Fed intends to slow rising borrowing costs by cooling a still-strong job market to limit wage growth and other inflationary pressures. However, the risk is growing that the Fed could weaken the economy so badly that it will cause a downturn and lead to job losses.

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

Still, Powell and other Fed officials said the central bank was aiming for a so-called “soft landing,” where they would slow economic growth to curb inflation but not trigger a recession.

However, by last week, after the government reported inflation more than Last year was a painful 8.3%To make matters worse, so-called core prices, which exclude the volatile food and energy categories, are rising much faster than expected.

The inflation report also documents how far inflation has spread across the economy, complicating the Fed’s anti-inflation efforts.Inflation now Increasingly driven by higher wages and steady consumer desire to spend And even fewer supply shortages plagued the economy during the pandemic-induced recession.

“They’re going [to] Try to avoid a recession,” said former New York Fed President William Dudley. “They’re going to try to have a soft landing. The problem is that there is little room for doing this right now. “

At a news conference on Wednesday after the Fed meeting, Powell is unlikely to drop any hints that the Fed will ease its credit tightening efforts. Most economists expect the Fed to stop raising interest rates in early 2023. But for now, they expect Powell to strengthen his hawkish anti-inflation stance.

“It’s going to end up being a hard landing,” said Oxford Economics economist Casey Bosjancic.

“He wouldn’t say that,” Bosjancic said. But speaking of the most recent Fed meeting in July, Powell raised hopes of an eventual pullback in raising rates, adding: “He also wants to make sure the market doesn’t bounce and bounce back. That was the case last time.”

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

in a The last press conference in June, Powell has noted that three-quarters of a rate hike was an “unusually large one” and hinted that “I don’t think a move of this magnitude is widespread.” However, the Fed now appears to be almost on the verge of a move after a shocking August inflation report. A third such rate hike in a row will certainly be announced. A fourth such hike is also possible if future inflation indicators do not improve.

Since the early 1980s, the central bank has carried out a series of fastest rate hikes. However, some economists — and some Fed officials — argue that they have yet to raise interest rates to levels that would actually limit borrowing and spending and slow growth.

Cleveland Federal Reserve President Loretta Mester, one of 12 officials who will vote on the Fed’s decision this week, said she sees a need to raise the Fed’s interest rates to “early next year”. Just over 4% and stay there.”

“I don’t expect the Fed to cut rates next year,” Mester added, dampening expectations for many investors on Wall Street who had hoped for such a reversal. Comments such as Mester sent shares sharply lower after Powell delivered a scathing anti-inflation speech at an economic conference in Jackson Hole, Wyoming, last month.

“Our responsibility to achieve price stability is unconditional,” Powell said at the time — a phrase widely interpreted to mean the Fed will fight inflation, even if it requires massive job losses and a recession.

Many economists sound confident that a recession and massive layoffs will be necessary to slow price increases.Research Released earlier this month Backed by the Brookings Institution, it concluded that unemployment may have to be as high as 7.5% to bring inflation back to the Fed’s 2% target.

According to a paper by Johns Hopkins University economist Lawrence Ball and two economists at the International Monetary Fund, only a recession of this magnitude would reduce wage growth and consumer spending, thereby cooling inflation.

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