Fed Attacks Inflation With Another Big Hike and Expects More

September 21, 2022by Christopher Rugaber, Associated Press Economics Writer
Fed Attacks Inflation With Another Big Hike and Expects More
A for sale sign is posted in front of a home in Sacramento, Calif., Thursday, March 3, 2022. (AP Photo/Rich Pedroncelli, File)

WASHINGTON (AP) — 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 percentage point higher than they had forecast as recently as June. And they expect to raise the rate further next year, to about 4.6%. That would be the highest level since 2007.

On Wall Street, stock prices fell and bond yields rose in response to the Fed’s projection of further steep rate hikes ahead.


The central bank’s action Wednesday followed a government report last week that showed high costs spreading more broadly through the economy, with price spikes for rents and other services worsening even though some previous drivers of inflation, such as gas prices, have eased. 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.

Fed officials have said they’re 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 economists increasingly 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.

In their updated economic forecasts, the Fed’s policymakers project that economic growth will remain weak for the next few years, with rising unemployment. It expects 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 the unemployment rate has risen by a half-point over several months, a recession has always followed.

Fed officials now see the economy expanding just 0.2% this year, sharply lower than its forecast of 1.7% growth just three months ago. And it expects sluggish growth below 2% from 2023 through 2025.

And 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.

Chair Jerome 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.”

Falling gas prices have slightly lowered headline inflation, which was a still-painful 8.3% in August compared with a year earlier. Declining gas prices 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.


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. The economy hasn’t seen rates as high as the Fed is projecting since before the 2008 financial crisis. Last week, the average fixed mortgage rate topped 6%, its highest point in 14 years. 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, though, 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.

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.

Konczal said there is a case to be made for the Fed to slow its rate hikes over the next two meetings.

“Given the cooling that’s coming,” he said, “you don’t want to rush into this.”

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.

Only a downturn that harsh would reduce wage growth and consumer spending enough to cool inflation, according to the research, by Johns Hopkins University economist Laurence Ball and two economists at the International Monetary Fund.

A+
a-

In The News

Health

Voting

Economy

September 27, 2022
by Dan McCue
Consumer Confidence Improved Again in September

NEW YORK — Consumer confidence jumped to a five-month high this month as falling gas prices helped ease the pinch... Read More

NEW YORK — Consumer confidence jumped to a five-month high this month as falling gas prices helped ease the pinch of stubbornly persistent inflation. According to The Conference Board, the nonpartisan, member-driven think tank, its Consumer Confidence Index® increased in September for the second consecutive month. ... Read More

September 23, 2022
by Tom Ramstack
Senators Suggest More Incentives for Rechargeable Battery Development

WASHINGTON — If rechargeable batteries leading the switch away from gasoline-powered vehicles are impressive, electrical industry executives told a Senate... Read More

WASHINGTON — If rechargeable batteries leading the switch away from gasoline-powered vehicles are impressive, electrical industry executives told a Senate panel Thursday they haven’t seen anything yet. They say they are developing new technologies that will generate more electricity than lithium-ion batteries at a lower cost.... Read More

Fed Attacks Inflation With Another Big Hike and Expects More

WASHINGTON (AP) — Intensifying its fight against high inflation, the Federal Reserve raised its key interest rate Wednesday by a... Read More

WASHINGTON (AP) — 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... Read More

High Inflation in Sight, Fed to Signal More Rate Hikes Ahead

WASHINGTON (AP) — Last month, when Federal Reserve Chair Jerome Powell spoke at an economic conference in Jackson Hole, Wyoming,... Read More

WASHINGTON (AP) — Last month, when Federal Reserve Chair Jerome Powell spoke at an economic conference in Jackson Hole, Wyoming, he issued a blunt warning: The Fed's drive to curb inflation by aggressively raising interest rates, he said, would "bring some pain" for Americans. When the... Read More

September 19, 2022
by Dan McCue
Study Finds US Can Gain Durable Competitive Advantage by Investing in Clean Energy

WASHINGTON — Strategic investments in six key “clean” technologies could yield “massive and lasting benefit” for the U.S. economy by... Read More

WASHINGTON — Strategic investments in six key “clean” technologies could yield “massive and lasting benefit” for the U.S. economy by mid-century, a new report says. The study, commissioned by Third Way, a D.C.-based think tank, and Breakthrough Energy, and researched by the Boston Consulting Group, focuses... Read More

September 15, 2022
by Dan McCue
Biden Calls Tentative Railway Deal ‘A Big Win for America’

WASHINGTON — President Joe Biden made a last-minute addition to his public schedule on Thursday, inviting railroad and union leaders... Read More

WASHINGTON — President Joe Biden made a last-minute addition to his public schedule on Thursday, inviting railroad and union leaders to the White House to celebrate their averting a nationwide strike that could have crippled the U.S. economy. Many of those invited to the Oval Office... Read More

News From The Well
scroll top