Fed attacks inflation with another big hike and expects more

Associated Press — The Federal Reserve intensified its campaign against persistently high inflation on Wednesday by raising its benchmark interest rate by three-quarters of a point for the third consecutive time and signaling additional swift rate increases to come. This aggressive pace is increasing the likelihood of an eventual recession.

Due to the Fed's action, the benchmark short-term rate, which is a factor in many consumer and commercial loans, has increased to its highest level since early 2008, ranging from 3% to 3.25%.

The policymakers also anticipated raising their benchmark rate by one full percentage point from their June prediction to around 4.4% by year's end. And they anticipate raising the rate even more the following year, to roughly 4.6%. The level would be the greatest since 2007.

Rates so high would be well into what the Federal Reserve refers to as "restrictive" area, which means they would be designed to significantly reduce borrowing and spending, moderate wage growth, and combat excessive inflation.

Action by the central bank Wednesday came after a government report last week that showed high prices spreading more widely throughout the economy, with rent price spikes and other service price spikes getting higher despite some prior drivers of inflation, like petrol prices, having decreased. The Fed increases borrowing costs, making it more expensive to get a mortgage, a vehicle loan, or a business loan. After that, it is likely that people and companies would borrow less and spend less, which will limit inflation and chill the economy.

According to Fed officials, a "soft landing" is what they are aiming for, whereby they can manage to limit GDP just enough to control inflation but not enough to start a recession. However, more and more experts are expressing the opinion that the Fed's sharp rate increases will eventually result in job losses, growing unemployment, and a full-fledged recession in the latter part of this year or early in the following year.

In a speech last month, Chair Jerome Powell recognized that the Fed's actions may "bring some pain" to individuals and companies. Additionally, he stated that the central bank's commitment to reducing inflation back down to its 2% objective was "unconditional."

The headline inflation rate, which was a still-painful 8.3% in August compared to a year earlier, has been modestly reduced by falling gas prices. President Joe Biden's recent increase in support from the general public, which Democrats hope will improve their chances in the November midterm elections, may have been influenced by falling gas costs.

By significantly increasing the cost of mortgages, car loans, and business loans, short-term rates at the level the Fed is now projecting would increase the likelihood of a recession in 2019. Since before the 2008 financial crisis, the economy hasn't seen rates as high as what the Fed anticipates. It reached its highest level in 14 years last week when the average fixed mortgage rate surpassed 6%. According to Bankrate.com, the cost of credit card borrowing has risen to its highest level since 1996.

Inflation today appears to be driven less by supply constraints that plagued the economy during the pandemic recession and more by better incomes and consumers' consistent willingness to spend. However, Biden stated on CBS' "60 Minutes" on Sunday that he thought there was still a chance for an economic soft landing and that his administration's new energy and healthcare measures will result in cheaper costs for prescription drugs and medical treatment.

A growing number of economists are expressing fear that the Fed's swift rate increases, which are the quickest since the early 1980s, would have an adverse economic impact beyond what is necessary to control inflation. Mike Konczal, an economist at the Roosevelt Institute, observed that the economy is already slowing and that wage growth, a major contributor to inflation, are leveling off and, in some cases, even slightly dropping.

Additionally, surveys reveal that Americans anticipate a large decline in inflation over the following five years. This is a significant trend because people's expectations of inflation may self-fulfill themselves. If individuals anticipate lower inflation, some will feel less temptation to make more purchases. Therefore, spending less would assist to restrain price rises.

There is a case to be made, according to Konczal, for the Fed to scale back its rate increases at its next two sessions.

You don't want to hurry into this, he remarked, given the impending cooling.

Concerns about a potential worldwide recession have increased as a result of the Fed's swift rate increases, which are similar to those being made by other major central banks. Three-quarters of a percentage point was added to the European Central Bank's benchmark rate last week. Significant rate rises have recently been implemented by the Bank of England, Reserve Bank of Australia, and Bank of Canada.

Additionally, the recurrent COVID lockdowns by the government in China, the second-largest economy in the world, are already hurting the country's progress. The U.S. economy might crash if a recession sweeps through most major economies.

Some economists, as well as some Fed officials, contend that despite the Fed's faster rate increases, rates have not yet been raised to the point where they would truly limit borrowing and spending and hamper growth.

Many economists appear to be of the opinion that massive layoffs will be required to stop price increases. According to studies conducted by the Brookings Institution and released earlier this month, unemployment may need to reach 7.5% in order to bring inflation back to the Fed's 2% objective.

The study was conducted by economist Laurence Ball of Johns Hopkins University and two economists from the International Monetary Fund. They found that only a downturn so severe would slow wage growth and consumer spending sufficiently to control inflation.