WASHINGTON – The Federal Reserve went ahead with a third straight outsize interest rate hike on Wednesday in an effort to squash high inflation – but economists worry that the campaign risks further setbacks by next year.
The Fed raised its key short-term rate by three-quarters of a percentage point to a range of 3% to 3.25%, a higher-than-usual level designed to moderate inflation by slowing the economy. He added significantly to his forecast of what the rate will be at the end of both this year and 2023.
Fed officials now forecast the key rate will end 2022 at a range of 4.25% to 4.5%, a full percentage point above the 3.25% to 3.5% they projected in June, and close next year at 4.5 % to 4.75%, according to their median estimate. That suggests the central bank could approve another three-quarter point hike at its November meeting and then a half-point rate hike in December.
But within the next year or two, as higher rates curb economic activity, Fed policymakers expect growth to weaken significantly. The central bank expects to cut the fed funds rate by about three-quarters of a point in 2024, likely in response to a slowing economy or possibly a recession.
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The economy is already pulling back. In a statement after a two-day meeting, the Fed said, “Recent indicators point to modest growth in spending and output” but “job gains are strong…and the unemployment rate remains low.”
He added that he “expects continued increases” in the fed funds rate to be “appropriate”.
The 2-year Treasury yield and stocks react
Stocks fell after the Fed’s announcement. The Dow Jones Industrial Average, Nasdaq Composite and S&P 500 turned negative. Yields on 2-year Treasury notes rose more than 100 basis points to more than 4.1%, the highest level since 2007, indicating investors see a ways to go before the Fed gets inflation under control.
What was the Fed rate hike today?
Wednesday’s rate hike of 0.75 percentage points is expected to ripple back through the economy, raising rates for credit cards, home equity lines of credit and other loans. Fixed, 30-year mortgage rates have risen above 6% from 3.22% earlier this year. At the same time, households, especially the elderly, are enjoying higher bank savings returns after years of piddling returns.
Barclays says Fed policymakers have had little choice but to raise rates sharply again after a report last week revealed that inflation — as measured by the consumer price index (CPI) — rose 8.3% annually in in August, below June’s 40-year high of 9.1%. but above the 8% that was expected.
Employers also added a healthy 315,000 jobs in August and average hourly wages rose 5.2% year over year. That could prompt further price rises as companies struggle to maintain profit margins.
Markets that try to predict where rates are headed figured there was an 18% chance that Fed policymakers would raise rates by a full percentage point on Wednesday.
Are we in recession in 2022?
But Goldman Sachs economist David Mericle says not much has changed since Fed Chairman Jerome Powell told reporters in late July that the pace of rate hikes would likely be slow to account for the increased risk of a recession. Rather, he says, the Fed is partly trying to deliver a message to stock markets that have until recently grown complacent about the prospect of more rate hikes.
Growth is slowing as the Fed pushes borrowing costs higher. The Fed said on Wednesday that it expects the economy to grow just 0.2% this year and 1.2% in 2023, below its June estimate of 1.7% for both years, according to officials’ median estimate.
Unemployment is forecast to rise from 3.7% to 4.4% by the end of next year, well above the forecast of 3.9%.
And the Fed’s preferred annual measure of inflation – which is different than the CPI – is expected to ease from 6.3% in August to 5.4% by the end of the year, slightly above Fed officials’ previous forecast of 5.2%. and 2.8% percent. end of 2023. That would be well above the Fed’s 2% target.
Even without major rate hikes, inflation is expected to slow as supply chain bottlenecks ease, commodity prices fall, a strong dollar lowers import costs and retailers offer deep discounts on thin, bloated inventories. However, Powell said that it is essential that the Fed raises rates to reduce consumer inflation expectations, which could affect actual price increases.
A growing number of economists believe that the Fed’s aggressive monetary policy – which started its key rate in 2022 close to zero – will boost the economy. Economists say there is a 54% chance of a downturn next year, up from 39% odds in June, according to a survey by Wolters Kluwer Blue Chip Economic Indicators.
For months, Fed Chairman Jerome Powell said he thought the central bank could tame inflation without triggering a recession. But in a speech last month at the Fed’s annual conference in Jackson Hole, Wyoming, he acknowledged that higher rates and slower growth will “bring some pain to families and businesses. These are the unfortunate costs of reducing inflation.”
This article originally appeared on USA TODAY: Fed raises interest rate again to curb inflation; what it means to you