Intensifying its war against chronic high inflation, the Federal Reserve raised its key interest rate on Wednesday by three-quarters of a large point for the third time in a row, an aggressive pace that raises the risk of an eventual recession.
The Fed’s move boosted the benchmark short-term interest rate, which affects many consumer and business loans, to a range of 3% to 3.25%, the highest level since early 2008. Policy makers also indicated that by early 2023, they expect more Rates raised much higher than expected in June.
The central bank’s action followed a government report last week Shows rising costs spread more widely through the economyWith the exacerbation of the rises in the prices of rents and other services despite the easing of some of the previous factors of inflation, such as gas prices. By raising borrowing rates, the Federal Reserve makes it more expensive to obtain a mortgage, car or business loan. Consumers and businesses are then supposed to borrow and spend less, cooling the economy and slowing inflation.
Fed officials said they are seeking a “soft landing,” in which they can slow growth enough to tame inflation but not so much as to trigger a recession. Increasingly, however, economists say they believe sharp rate increases by the Fed will, over time, lead to job cuts, increased unemployment, and a full-blown recession late this year or early next.
President Jerome Powell admitted this in a speech last month Fed moves ‘will bring some pain’ For families and businesses. He added that the central bank’s commitment to reduce inflation to the 2% target was “unconditional”.
Lower gas prices slightly lowered headline inflation, which was still a painful 8.3% in August compared to a year earlier. Lower gas prices may have contributed to the recent spike in President Biden’s public approval ratings, which Democrats hope will bolster their expectations in the November midterm elections.
Short-term rates at the level the Fed now imagines would make a recession more likely next year by sharply raising the costs of mortgages, auto loans and business loans. The economy has not seen rates as high as the Fed expects since before the 2008 financial crisis. Last week, the average fixed-rate mortgage rate exceeded 6%, its highest level in 14 years. Credit card borrowing costs are at their highest level since 1996, according to Bankrate.com.
Inflation now appears increasingly to be fueled by rising wages and consumers’ steady desire to spend, and to a lesser extent by the lack of supplies that crippled the economy during the pandemic recession. Despite this, Biden said Sunday on CBS’ “60 Minutes” that he believes an easy landing for the economy is still possible, suggesting that his recent energy and health care administration legislation will lower drug and health care prices.
Some economists are beginning to worry that rapid increases in federal interest rates – the fastest since the early 1980s – will do too much economic damage to tame inflation. Mike Konzal, an economist at the Roosevelt Institute, has noted that the economy is already slowing and that wage increases – the main driver of inflation – are stabilizing and some measures are falling.
Surveys also show that Americans expect inflation to drop dramatically over the next five years. This is an important trend because inflation expectations can be self-fulfilling: if people expect inflation to fall, some will feel less pressure to speed up their purchases. Less spending would help moderate price increases.
Konczal said there is an argument to be made for the Fed to slow rate hikes over the next two meetings.
“Given the cold coming,” he said, “you don’t want to rush into this.”
Rapid interest rate increases by the Federal Reserve mirror the steps other major central banks are taking, contributing to concerns about a possible global recession. Last week, the European Central Bank raised its benchmark interest rate by three-quarters of a percentage point. The Bank of England, the Reserve Bank of Australia and the Bank of Canada have all raised interest rates significantly in recent weeks.
And in China, the world’s second-largest economy, growth is already suffering from repeated government shutdowns of the coronavirus. If a recession engulfs most of the big economies, it could derail the US economy as well.
Even with the Fed’s accelerating rate of rate hikes, some economists – and some Fed officials – argue that they have not yet raised rates to a level that will constrain borrowing and spending and slow growth.
Many economists seem convinced that large-scale layoffs will be necessary to slow price increases. Research published earlier this month sponsored by the Brookings Institution concluded that unemployment may have to rise to 7.5% to bring inflation back to the Fed’s 2% target.
Only a severe deflation would reduce wage growth and consumer spending enough to cool inflation, according to research by Johns Hopkins University economist Lawrence Ball and two economists at the International Monetary Fund.