Fed attacks inflation with another big hike and expects more

·3 min read



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 three percent to 3.25 percent, the highest level since early 2008.

The officials also forecast that they will further raise their benchmark rate to roughly 4.4 percent 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 percent. 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 percent 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 two percent 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.”

‘Soft landing’

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 percent by the end of 2023, up from its current level of 3.7 percent. 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 percent this year, sharply lower than their forecast of 1.7 percent growth just three months ago. And they envision sluggish growth below two percent 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 percent at the end of next year, well above its two percent

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 two percent target was “unconditional.”(AP)