The Fed should raise rates to fight inflation

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The Federal Reserve is expected to raise interest rates by three-quarters of a percentage point on Wednesday in the latest push to curb inflation, which remains at its highest level in 40 years, threatens the entire economy and weighs on families and businesses nationwide.

The rate hike, which will be announced at the end of the Fed’s two-day policy meeting, is the fourth hike this year, and should match an equally aggressive move last month. So far, the Fed has received little assurance that its inflated rate hikes are working, as households feel pressure from more expensive rent, groceries and gasoline. Inflation in June even hit a new high – climbing 9.1% from a year earlier – raising the risk of recession as the Fed moves more forcefully to slow the economy.

“The Fed is now stuck between a rock and a hard place, with no easy way out without the economy suffering,” wrote Diane Swonk, chief economist at KPMG, in an analyst note this week. “Chairman of the Fed [Jerome H. Powell] began to underline this reality by admitting that a recession could occur.

5 economic forces behind the Fed’s next rate hike decision

Interest rates are the Fed’s most important factor inflation-fighting tool. Higher rates make a range of loans – including mortgages and business loans – more expensive and are designed to cool demand in the economy.

The work of the Fed has already started to slow down parts of the economy. Chief among them: rising rates tame the housing market as potential buyers turn away from more expensive mortgages. Home sales are down in a few markets.

A slowdown is also apparent in other sectors of the economy. Several major tech companies have taken a hit, with Netflix, Tesla and Coinbase all announcing job cuts or hiring freezes. On Tuesday, Alphabet and Microsoft, Google’s parent company, reported slower growth in earnings reports. GM, one of the nation’s largest automakers, reported much lower profits, with CEO Mary Barra warning that the company is working to cut spending and limit hiring.

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Still, June’s searing inflation report showed the Fed still had work to do. Inflation falls hardest on vulnerable families who do not have the ability to stretch their budgets. Rising prices for milk, gasoline or clothing also hurt people’s perception of how the economy is working for them, weighing on consumer sentiment and opening the door for people to change their own spending behavior and further worsen inflation.

The economic gloom — particularly around gas prices — also poses a huge political problem for the Biden administration ahead of the midterm elections. Republicans blame Democrats’ early pandemic stimulus efforts for boosting the economy and, along with some moderate Democrats, are resisting more federal spending, including on the White House’s social spending proposals.

The Fed’s interest rate decision comes as economists and policymakers already fear the economy is heading into a recession. Second-quarter GDP figures will be released on Thursday, and it’s possible the economy has indeed shrunk, as it did in the first quarter. Two consecutive quarters of negative growth usually signal a recession.

At the same time, a host of other signs suggest that the United States is not in recession. Labor market continues to grow overall, despite pockets of labor market starting to show some cracks. Consumers continue to spend, especially on services. Companies are not showing signs of widespread layoffs.

The labor market is starting to show cracks

The Fed’s objective is to cool the economy in such a way as to reduce calls for new hires, but does not induce employers to withdraw to the point of increasing unemployment. The glaring problem is that the Fed cannot do this with precision. The Fed’s economic forecast shows the unemployment rate rising a bit as interest rates rise, meaning some workers will lose their jobs under the current interest rate hike plan.

“We’re not looking to put people out of work, of course,” Powell said at a press conference in June. “We never think, ‘Too many people are working and fewer people need a job.’ But we also think you really can’t have the kind of labor market we want without price stability. »

Powell will appear at a press conference at 2:30 p.m. Eastern Time, where he is expected to answer questions about inflation, the labor market, recession risks and the Fed’s future rate hike plans. .

Poorer countries could suffer from US efforts to slow inflation

In June, when the Fed raised rates by three-quarters of a percentage point, it was the most drastic action taken by the central bank since 1994. The Fed also raised rates by half a percentage point percentage in May and a quarter of a percentage point. peak in March.

Now, another three-quarters of a percentage point hike would put the Fed’s benchmark rate in a range of 2.25-2.5%, around what’s considered “neutral” territory, when rates don’t. are not intended to speed up or slow down the economy.

The Fed has signaled that three more rate hikes are coming this year, though Fed leaders regularly say the size of future hikes will depend on the most recent data.

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