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The Fed Intensifies Its Battle Against Inflation

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Struggling to contain the fastest inflation in 40 years, the Federal Reserve hiked interest rates sharply for the third time on Wednesday and predicted a more aggressive trajectory of monetary policy going forward.

The Federal Reserve Board Policy interest rate Three-quarters percentage point boost to the range of 3 to 3.25 percent. That’s a big jump from his March, when the federal funds rate was set at near zero, and the rise since then has seen the Fed make its fastest policy adjustment since his 1980s.

More notably, policy makers expected on wednesday They expect borrowing costs to rise to 4.4% by the end of the year and interest rates to be significantly higher than previously expected over the next few years. Fed Chairman Jerome H. Powell warned that the move would hurt the U.S. economy, but said it was essential to keep growth in check to keep prices down.

“Inflation has to be on the back burner,” Mr. Powell said at a news conference after the meeting. “I wish there was a painless way to do it.

The Fed’s grim predictions and the Fed Chairman’s comments amount to declarations such as: Central banks are determined to keep inflation in check, even if it costs the economy in the short term. The message got through to the market, which plunged in response to the news, with the S&P 500 index closing down 1.7%.

“We want to act aggressively now, get this job done, and continue until it’s done,” Powell said.

His tough rhetoric reflects a difficult reality for the Fed. Inflation is stubbornly rapid and has proven difficult to bring back under control.

Prices keep rising 3 times or more The central bank’s target interest rate of 2% is becoming harder to afford as everything from rent to food to household items continues to soar. The spike in inflation being felt globally is partly due to supply chain disruptions caused by the pandemic and the war in Ukraine. But price pressure is also coming from sustained consumer demand, allowing businesses to charge more without losing customers.

In fact, people continue to buy cars, retail goods, and dining out even as central banks begin to raise interest rates significantly. Businesses have hired rapidly, raised wages to get workers in short supply, and pushed up prices relentlessly, all while making huge profits.

The Federal Reserve is about to change that, a statement issued by the central bank clearly on Wednesday.

“This is consistent with the message that inflation is the number one enemy. Inflation must continue,” said Priya Misra, head of global rates research at TD Securities.

Federal Reserve policy works by limiting demand. Higher interest rates make it more expensive to borrow money to buy a car, house, or expand a business, slowing consumer spending and business expansion. As the economy cools and job and wage growth slows, companies will find it harder to charge their customers that much, paving the way for lower prices.

So the road to lower inflation can be painful. Officials expect next year’s unemployment rate he will rise to 4.4%. 3.7% It will remain at that level until 2024 as economic growth is well below potential.

“I think we need this,” Mr. Powell said. “We believe that labor market conditions also need to be eased.”

Fed officials think the cost will be worth it. Leaving inflation unchecked could make it a more permanent feature of the economy. As workers start to expect prices to rise sharply each year, they are more likely to demand faster wage increases. Companies will likely pass that cost on to their customers in the form of higher prices, fueling an unhealthy upward spiral.

Once inflation becomes the norm in everyday economic life, it may be difficult to eradicate. The Fed allowed uncomfortably rapid inflation to continue throughout the 1970s, and at that time Paul After he pushed the rate up to 10%, it weakened.

Many economists believe that drastic action was needed as inflationary psychology took hold. No one wants to repeat the same experience.

The Fed’s attempts to raise interest rates in the 1970s didn’t work well and “weren’t enough to keep inflation down,” said William English, a former director of the Fed’s financial affairs division and now an economist at Yale University. I’m here.

“That’s what they want to avoid,” he said. “In the end, higher inflation is unacceptable. We need to bring it down.”

But officials believe interest rates will need to rise significantly to slow growth enough to curb inflation. Their 2022 forecast suggests that rates could rise by three-quarters of a percentage point at the next meeting and half a percentage point at the Fed’s meeting in December. That’s higher than many on Wall Street expected before the meeting, with far more action than it actually is. the market was betting until just a few weeks ago.

And policymakers plan to continue the move. The central bank now expects borrowing costs to rise to 4.6% by the end of 2023, up from an estimated 3.8% in June. Fed officials expect rate cuts to begin in 2024, but expect them to do so slowly.

Given that central banks are gearing up to push interest rates to levels not seen since before the 2008 financial crisis, Misra was surprised the central bank didn’t predict even higher unemployment. said.

Unemployment rising to 4.4%, as predicted by the central bank, is downright painful. Omair Sharif, founder of Inflation Insights, calculated that there would be about 1.2 million more unemployed. But given the extent of tightening expected by central banks, it’s relatively modest. In the recession of 2008, Rising unemployment rate to 10 percent.

Mr. Powell conceded as well, saying that officials hope to improve the early stages of the supply chain and that the large number of unfilled job openings will provide a buffer to the economy and keep inflation under control without putting many people out of work. said.

Markets temporarily seemed to take these unemployment forecasts as an indication that the Fed might not take drastic action and avoid a crash in the economy and asset prices. Stocks jumped briefly during Mr. Powell’s remarks. However, they eventually declined again as investors digested his broader message.

“I wish there was a way to just want it, but there isn’t,” Mr. Powell said of inflation. “We need to balance supply and demand, and the way to do that is by slowing the economy.”

That solemn tone was a subtle but important shift for Mr. Powell. The Fed chairman has a history of highlighting the bright side of the economy. Inflation will fall without recession.

But on Wednesday, he explained that although there is reason to hope that the job market impact from higher interest rates would be less painful, “anyway, our job is to achieve price stability.” did.

When asked about housing, he explained that painful corrections may be needed to bring the market back into balance. He stressed that it may remain high for some time.

“I wish the best,” Powell said. ‘Prepare for the worst’

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