March 29, 2024 12:39 AM
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Fed attacks inflation with another big hike and expects more – Associated Press

Photo: Federal Reserve Chair Jerome Powell speaks at a news conference Wednesday, Sept. 21, 2022

Intensifying its fight against high inflation, the Federal Reserve raised its key interest rate Wednesday by a substantial three-quarters of a point for a third straight time and signaled more large rate hikes to come — an aggressive pace that will heighten the risk of an eventual recession.

The Fed’s move boosted its benchmark short-term rate, which affects many consumer and business loans, to a range of 3% to 3.25%, the highest level since early 2008.

The officials also forecast that they will further raise their benchmark rate to roughly 4.4% by year’s end, a full point higher than they had envisioned as recently as June. And they expect to raise the rate again next year, to about 4.6%. That would be the highest level since 2007.

By raising borrowing rates, the Fed makes it costlier to take out a mortgage or an auto or business loan. Consumers and businesses then presumably borrow and spend less, cooling the economy and slowing inflation.

Falling gas prices have slightly lowered headline inflation, which was a still-painful 8.3% in August compared with a year earlier. Those declining prices at the gas pump might have contributed to a recent rise in President Joe Biden’s public approval ratings, which Democrats hope will boost their prospects in the November midterm elections.

Speaking at a news conference, Chair Jerome Powell said that before Fed officials would consider halting their rate hikes, they would “want to be very confident that inflation is moving back down” to their 2% target. He noted that the strength of the job market is fueling pay gains that are helping drive up inflation.

And he stressed his belief that curbing inflation is vital to ensuring the long-term health of the job market.

“If we want to light the way to another period of a very strong labor market,” Powell said, “we have got to get inflation behind us. I wish there was painless way to do that. There isn’t.”

Fed officials have said they are seeking a “soft landing,” by which they would manage to slow growth enough to tame inflation but not so much as to trigger a recession. Yet most economists are skeptical. They say they think the Fed’s steep rate hikes will lead, over time, to job cuts, rising unemployment and a full-blown recession late this year or early next year.

“No one knows whether this process will lead to a recession, or if so, how significant that recession would be,” Powell said at his news conference. “That’s going to depend on how quickly we bring down inflation.”

In their updated economic forecasts, the Fed’s policymakers project that economic growth will remain weak for the next few years, with rising unemployment. They expect the jobless rate to reach 4.4% by the end of 2023, up from its current level of 3.7%. Historically, economists say, any time unemployment has risen by a half-point over several months, a recession has always followed.

Fed officials now foresee the economy expanding just 0.2% this year, sharply lower than their forecast of 1.7% growth just three months ago. And they envision sluggish growth below 2% from 2023 through 2025.

Even with the steep rate hikes the Fed foresees, it still expects core inflation — which excludes the volatile food and gas categories — to be 3.1% at the end of next year, well above its 2% target.

Powell acknowledged in a speech last month that the Fed’s moves will “bring some pain” to households and businesses. And he added that the central bank’s commitment to bringing inflation back down to its 2% target was “unconditional.”

Short-term rates at a level the Fed is now envisioning would make a recession likelier next year by sharply raising the costs of mortgages, car loans and business loans. Last week, the average fixed mortgage rate topped 6%, its highest point in 14 years, which helps explain why home sales have tumbled. Credit card borrowing costs have reached their highest level since 1996, according to Bankrate.com.

Inflation now appears increasingly fueled by higher wages and by consumers’ steady desire to spend and less by the supply shortages that had bedeviled the economy during the pandemic recession. On Sunday, Biden said on CBS’ “60 Minutes” that he believed a soft landing for the economy was still possible, suggesting that his administration’s recent energy and health care legislation would lower prices for pharmaceuticals and health care.

The law may help lower prescription drug prices, but outside analyses suggest it will do little to immediately bring down overall inflation. Last month, the nonpartisan Congressional Budget Office judged it would have a “negligible” effect on prices through 2023. The University of Pennsylvania’s Penn Wharton Budget Model went even further to say “the impact on inflation is statistically indistinguishable from zero” over the next decade.

Even so, some economists are beginning to express concern that the Fed’s rapid rate hikes — the fastest since the early 1980s — will cause more economic damage than necessary to tame inflation. Mike Konczal, an economist at the Roosevelt Institute, noted that the economy is already slowing and that wage increases — a key driver of inflation — are levelling off and by some measures even declining a bit.

Surveys also show that Americans are expecting inflation to ease significantly over the next five years. That is an important trend because inflation expectations can become self-fulfilling: If people expect inflation to ease, some will feel less pressure to accelerate their purchases. Less spending would then help moderate price increases.

The Fed’s rapid rate hikes mirror steps that other major central banks are taking, contributing to concerns about a potential global recession. The European Central Bank last week raised its benchmark rate by three-quarters of a percentage point. The Bank of England, the Reserve Bank of Australia and the Bank of Canada have all carried out hefty rate increases in recent weeks.

And in China, the world’s second-largest economy, growth is already suffering from the government’s repeated COVID lockdowns. If recession sweeps through most large economies, that could derail the U.S. economy, too.

Even at the Fed’s accelerated pace of rate hikes, some economists — and some Fed officials — argue that they have yet to raise rates to a level that would actually restrict borrowing and spending and slow growth.

Many economists sound convinced that widespread layoffs will be necessary to slow rising prices. Research published earlier this month under the auspices of the Brookings Institution concluded that unemployment might have to go as high as 7.5% to get inflation back to the Fed’s 2% target.

“The risk is that the Fed acts more aggressively in its mission to return inflation back to its 2% objective, pushing the funds rate higher than previously expected and keeping it higher for longer,” Nancy Vanden Houten, lead U.S. economist at Oxford Economics, said Wednesday after the Fed’s meeting.

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AP Economics Writer Paul Wiseman contributed to this report.

 

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2 Responses

  1. Timid steps by the Biden administration. These rate hikes are making the inflation continue on for a longer period. The rate increases need to be 1.5 points or higher to shock industries into adjusting to a slower economy and quickening the recovery. Too bad Democrat politics are attempting to gain support for the mid term elections with these slow moves; meanwhile we still cannot afford food, fuel and increases in services and products we need. Savings and credit are being eroded through a true 16 % plus cost increases. Be sure to vote for change as our future depends on it.

  2. Make no mistake, the awful economic conditions and the need to raise interest rates were caused by the destructive decisions made by Joe Biden, The Space Clown, Blondie the Fake Firebrand and the rest of the Democrat Money Thieves to SPEND, SPEND, SPEND. They spent trillions with only a small fraction of it going back to the US Taxpayer (you know the people that coughed up the money to begin with).

    UKRAINE
    BUYING VOTES
    GRAFT, LEAKAGE, WE-DONT-KNOW-WHERE-THE-MONEY-WENT
    ELECTION THEFT (HEY, MULES COST A LOT OF MONEY, EH?)
    INFLATING DEMOCRAT-VOTING BUREAUCRACIES
    GIVING WEAPONS TO THE TALIBAN
    FREE STUFF TO ILLEGAL IMMIGRANTS AS LONG AS THEY “VOTE DEMOCRAT”
    FREE STUFF TO FREELOADERS

    JOHN KERRY FLYING AROUND THE WORLD IN HIS PRIVATE JET TELLING US WE’RE ALL ABOUT TO DIE BECAUSE OF “THE HORRIBLE CLIMATE EMERGENCY”

    Economics is actually pretty straightforward. If a majority of people are working and producing, the economy does well, If large numbers of people are gaming the system, committing crimes, pushing radical filth in schools and swarming across the border, then the economy does poorly.

    SOLUTION: Vote the clowns out of office. Vote for Law & Order Constitutional Conservatives in such large numbers that the Radical Left Money Thieves can’t steal the election. Get people back to work. End the ridiculous entitlement programs. STOP SPENDING TAXPAYER MONEY. It’s the only solution folks.

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