How much 'pain'?  The Fed announces more rate hikes in the future

WASHINGTON — Federal Reserve Chairman Jerome Powell bluntly warned in a speech last month that the Fed’s campaign to curb inflation by aggressively raising interest rates “would bring some pain.” On Wednesday, Americans may get a better idea of ​​how much pain could be in store.

The Fed at its latest meeting is expected to raise its key short-term rate by a substantial three-quarters of a point for the third time in a row. Another hike that big would lift its benchmark rate, which affects many consumer and business loans, to a range of 3% to 3.25%, the highest level in 14 years.

In another sign of the Fed’s growing concern about inflation, it is also likely to signal that it plans to raise rates much higher by the end of the year than it had forecast three months ago, and keep them higher for a longer period.

Economists expect Fed officials to forecast that its key rate could hit 4% by the end of this year. They are also likely to signal further increases in 2023, perhaps to about 4.5%.

Short-term rates at that level would make a recession more likely next year by dramatically increasing the cost of mortgages, auto loans and business loans. The Fed intends those higher borrowing costs to slow growth by cooling down a still-robust job market to limit wage growth and other inflationary pressures. However, the risk is growing that the Fed will weaken the economy enough to cause a recession leading to job losses.

The US economy hasn’t seen rates as high as the Fed projects since before the 2008 financial crisis. Last week, the average fixed mortgage rate topped 6%, its highest point in 14 years. Credit card loan costs have reached their highest level since 1996, according to

Powell and other Fed officials still say the Fed’s goal is to achieve a so-called “soft landing,” whereby they would slow growth enough to control inflation but not enough to trigger a recession.

Last week, however, that target seemed further out of reach after the government reported that inflation over the past year was a painful 8.3%. Worse yet, so-called core prices, which exclude volatile food and energy categories, rose much faster than expected.

The inflation report also documented how widely inflation has spread through the economy, complicating the Federal Reserve’s anti-inflation efforts. Inflation now appears to be increasingly driven by higher wages and consumers’ continued desire to spend, and less by supply shortages that had plagued the economy during the pandemic downturn.

“They’re going to try to avoid recession,” said William Dudley, former president of the Federal Reserve Bank of New York. “They are going to try to make a soft landing. The problem is that the space to do that is practically non-existent right now.”

At a news conference on Wednesday after the Fed meeting ends, Powell is not likely to hint that the central bank will ease its credit tightening campaign. Most economists expect the Fed to stop raising rates by early 2023. But for now, they expect Powell to reinforce his hardline anti-inflation stance.

“It’s going to end up being a hard landing,” said Kathy Bostjancic, an economist at Oxford Economics.

“He’s not going to say that,” Bostjancic said. But, referring to the most recent Fed meeting in July, when Powell raised hopes of an eventual pullback on rate hikes, he added: “He also wants to make sure the markets don’t go out and rally. That’s what happened last time.”

Indeed, investors responded by raising stock prices and buying bonds, driving down rates on securities like the benchmark 10-year Treasury. Higher stock prices and lower bond yields generally boost the economy, the opposite of what the Fed wants.

At an earlier news conference in June, Powell had called a three-quarter percentage point rate hike “unusually large” and suggested “I don’t expect moves of this size to be common.” However, after August’s alarming inflation report, the Fed now seems all but certain to announce its third consecutive such hike. A fourth such increase is also possible, if future measures of inflation do not improve.

The central bank has already engaged in the fastest series of interest rate hikes since the early 1980s. Yet some economists, and some Fed officials, argue that they have yet to raise rates to a level that actually restrains borrowing and spending and slows growth.

Loretta Mester, president of the Federal Reserve Bank of Cleveland and one of 12 officials who will vote on the Fed’s decision this week, said she believes it will be necessary to raise the Fed’s rate to “something above 4% at early next year and store it there.

“I don’t anticipate the Fed cutting” rates next year, Mester added, dispelling the expectations of many investors on Wall Street who had expected such a reversal. Comments like Mester’s contributed to a sharp drop in stock prices last month that began after Powell’s scathing anti-inflation speech at an economic conference in Jackson Hole, Wyoming.

“Our responsibility to provide price stability is unconditional,” Powell said at the time, a comment widely interpreted to mean that the Fed will fight inflation, even if that requires huge job losses and a recession.

Many economists seem convinced that a recession and widespread layoffs will be necessary to curb rising prices. Research published earlier this month under the auspices of the Brookings Institution concluded that unemployment could reach 7.5% for inflation to return to the Fed’s 2% target.

Only such a harsh recession would slow wage growth and consumer spending enough to cool inflation, according to a paper by Johns Hopkins University economist Laurence Ball and two International Monetary Fund economists.

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