Stepping up its fight against high inflation, the Federal Reserve on Wednesday raised its key interest rate by a substantial three-quarters of a point for the third consecutive time and signaled more significant rate hikes to come – an aggressive pace that will increase the risk of a possible recession.

The Fed’s decision raised 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.

Officials also forecast that they will raise their benchmark rate further to around 4.4% by the end of the year, up one percentage point from what they forecast last June. And they expect to raise the rate further next year, to around 4.6%. It would be the highest level since 2007.

On Wall Street, stock prices fell and bond yields rose in response to the Fed’s expectation of further significant rate hikes to come.

The central bank’s action on Wednesday followed a government report last week that showed high costs were spreading more widely through the economy, with price spikes in rents and other services worsening even as some Previous drivers of inflation, such as gasoline prices, have abated. By raising borrowing rates, the Fed is making it more expensive to take out a mortgage or car or business loan. Consumers and businesses are likely to borrow and then spend less, which cools the economy and slows inflation.

Fed officials have said they are looking for a “soft landing” where they manage to slow growth enough to bring inflation under control, but not so much as to trigger a recession. Yet economists are increasingly saying they believe the Fed’s steep rate hikes will, over time, lead to job cuts, rising unemployment and a broad-based recession at the end of this year or early next year.

In their updated economic forecasts, Fed policymakers expect economic growth to remain weak over the next few years, with rising unemployment. He expects the unemployment rate to reach 4.4% by the end of 2023, up from its current level of 3.7%. Historically, economists say, whenever the unemployment rate has risen by half a point over several months, a recession has always followed.

Fed officials now see the economy growing just 0.2% this year, significantly lower than its 1.7% growth forecast just three months ago. And he expects slow growth below 2% from 2023 to 2025.

And even with the big rate hikes planned by the Fed, it still expects core inflation – which excludes the volatile food and gas categories – to be 3.1% by the end. next year, well above its target of 2%.

Chairman Jerome Powell acknowledged in a speech last month that the Fed’s actions will “suffer” households and businesses. And he added that the central bank’s commitment to bringing inflation back to its 2% target was “unconditional”.

Falling gasoline prices slightly lowered headline inflation, which was still a painful 8.3% in August from a year earlier. Lower gasoline prices may have contributed to a recent boost in President Joe Biden’s approval ratings, which Democrats hope will improve their prospects in November’s midterm elections.

Short-term rates at a level the Fed is now considering would make a recession more likely next year by sharply raising the costs of mortgages, auto loans and business loans. The economy hasn’t seen rates as high as the Fed predicted since before the 2008 financial crisis. Last week, the average fixed mortgage rate rose above 6%, its highest level 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 consumers’ constant desire to spend and less by the supply shortages that had plagued the economy during the pandemic recession. On Sunday, however, Biden said on CBS’s “60 Minutes” that he believed a soft landing for the economy was still possible, suggesting that his administration’s recent legislation on energy and health care would make lower the prices of pharmaceuticals and health care.

Some economists are beginning to worry that the Fed’s rapid rate hikes — the fastest since the early 1980s — may cause more economic damage than necessary to bring inflation under control. Mike Konczal, an economist at the Roosevelt Institute, noted that the economy is already slowing and wage increases – a key driver of inflation – are stabilizing and, by some measures, even declining a little.

Polls also show that Americans expect inflation to come down significantly over the next five years. This is an important trend because inflation expectations can become self-fulfilling: if people expect inflation to fall, some will feel less pressure to accelerate their purchases. Less spending would then contribute to moderating price increases.

Konczal said there was room 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 that.”

The Fed’s rapid rate hikes mirror actions taken by other major central banks, contributing to concerns about a possible global recession. The European Central Bank last week raised its key 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 made big rate hikes in recent weeks.

And in China, the world’s second largest economy, growth is already suffering from repeated government blockages. If the recession sweeps through most major economies, it could also derail the US economy.

Even at the accelerated pace of Fed rate hikes, some economists — and some Fed officials — say they have yet to raise rates to a level that would actually limit borrowing and spending and slow growth.

Many economists seem convinced that widespread layoffs will be needed to slow the rise in prices. A study released earlier this month under the auspices of the Brookings Institution concluded that unemployment may need to reach 7.5% to bring inflation back to the Fed’s 2% target.

According to research by Johns Hopkins University economist Laurence Ball and two economists from the International Monetary Fund, only such a severe slowdown would reduce wage growth and consumer spending enough to calm inflation.

(AP)

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