Federal Reserve warns of ‘pain’ ahead as inflation surges | Federal Reserve

Federal Reserve Chairman Jerome Powell warned last month of “pain” ahead as the central bank struggles to contain an inflation surge not seen in 40 years. Powell will provide some indication of how much pain he expects Wednesday.

The Fed is expected to announce another big rate hike on Wednesday afternoon after its latest meeting. It will also update its economic forecast for the U.S. economy.

Economists forecast the Fed will raise its benchmark interest rate by 0.75 percentage points, its third straight hike, and signaled plans to raise rates again in the coming months.

The rate hike comes as central banks around the world are raising interest rates in response to a soaring cost of living crisis. The Bank of England is expected to announce its biggest interest rate hike in 25 years this week, and the European Central Bank raised rates across the euro zone by a record amount earlier this month as inflation in some of its 19 member countries hit Double digits.

Last year, the Fed viewed inflation as a “transitory” problem caused by the pandemic and supply chain issues, but despite the Fed’s change of view and sharp rate hikes, consumer prices have remained high.

Prices last month were up 8.3 percent from last August, the Bureau of Labor Statistics announced last week. The Fed’s inflation target is 2% per year.

This message leads to some speculation The Fed could raise interest rates by a percentage point, a major move for an institution that typically moves rates up or down 25 percentage points cautiously.

The sharp rise in interest rates is designed to slow the economy and lower prices. Higher rates have hit the housing market, with rates on 30-year mortgages now exceeding 6% for the first time in 14 years.

But it will take time for the rate hikes to filter through to the wider economy, and so far they have done little to tame inflation or affect the job market. The US added 315,000 new jobs last month and the unemployment rate was 3.7%, still near a 50-year low.

Until recently, Powell hinted at the possibility of a “soft landing” for the economy, where higher interest rates lower prices without causing a severe financial recession.

But at last month’s annual meeting of central bankers in Jackson Hole, Wyoming, Powell acknowledged that economic woes are the price the Fed is willing to pay to keep inflation in check. “While higher interest rates, slower growth and weaker labor market conditions will reduce inflation, they will also cause some pain for households and businesses,” he said. “These are the unfortunate costs of lowering inflation. But failure to restore price stability will mean more pain.”

Ellen Zentner, chief U.S. economist at Morgan Stanley, said the Fed has yet to see the “pain” it thinks is necessary to curb inflation.

“The rate hikes have had little broad impact on the real economy so far, so there is scope for the Fed to continue raising rates into restrictive territory. Considering the housing adjustment is underway so far, if you squint carefully, you will see a slowdown in net job growth, and we’ve seen a deceleration in consumer spending, but it’s not enough to generate consistently below-potential growth the chairman is looking for,” Zentner wrote in a note to investors. . “Most importantly, the Fed needs more evidence that its actions are weakening the real economy.”