The Federal Reserve is expected to make three massive rate hikes in a row this week as it wages its most aggressive fight against inflation since the 1980s.
The central bank is widely expected to raise interest rates by 0.4 percentage points at Wednesday’s meeting, and investors believe there is even a slim chance of a 1 percentage point hike.
But Wall Street is more focused on what comes next. The official will release the latest economic forecasts for the first time since June after his two-day meeting this week. These are expected to mark a stronger interest rate outlook than Fed officials had previously anticipated as rapid inflation continues to plague America. The question is how assertive the Fed will be.
Central banks have already raised interest rates significantly to slow the economy and keep prices down. Business activity has slowed in response, but it is not falling off a cliff. Employers are still hiring, wages are rising, and inflation is stubbornly fast.
So officials began to emphasize in their speeches that they were serious about keeping prices down, even if it meant sacrificing growth and the labor market. It’s an inflation-focused tone many of us call “hawkish.”
Economic forecasts can give policymakers an opportunity to underscore their commitments.
“Things are not going as well as they hoped,” said Gennady Goldberg, U.S. rates strategist at TD Securities. “After all, there’s little they can do this week, but it sounds hawkish.”
Fed Chairman Jerome H. Powell will likely hold a press conference after the announcement and agree with his pledge to do what is necessary to bring prices down later in the month.
Powell concedes that it can be an arduous process. Higher interest rates make it more expensive to borrow money, thus moderating inflation and discouraging both consumption and business expansion. That could weigh on wage growth and even push up unemployment. Businesses can’t charge as much in a slowing economy, and inflation cools.
“Higher interest rates, slower growth and a softer labor market will keep inflation down, but it will also bring some pain to households and businesses,” Mr. Powell said last month. He later added, “I’ll keep doing it until I’m sure the job is done.”
If the Fed continues to hike rates along the trajectory increasingly expected by economists and investors, the impact could be disastrous. In the early 1980s, the last time inflation was as high as it is today was when central banks under Paul A. Volcker steep borrowing costs It rose sharply, plunged the economy into recession, and pushed unemployment to double-digit levels.home builder Mail to Mr. Volcker A two-by-four from a building they couldn’t build.car dealer sent key From the cars they couldn’t sell.
Inflation FAQ
What is inflation? Inflation is the loss of purchasing power over time. So your dollar won’t go as well tomorrow as it did today. This is usually expressed as annual fluctuations in the prices of commodities and services such as food, furniture, clothing, transportation, and toys.
Rate hikes this year are less severe. The Fed has raised interest rates from near zero in March to he range of 2.25-2.5%. If the central bank does what investors expect in the next few months, he will be well above 4% by the end of the year. In the 1980s, interest rates he jumped from 9% to about 19%.
Still, a 4% rate hike in 10 months would be the fastest policy adjustment since Volcker’s campaign. Fed policymakers hope the economy can be pulled down gently and without triggering a painful recession, but economists warn: Benign outcomes are less and less likely.
Its central bank stresses its obligation to keep inflation in check.
The Fed has two economic goals. Maximizing employment and stable inflation around 2%. Unemployment is currently very low, but prices are rising. 3 times or more Targeting interest rates based on the Fed’s favorite benchmark, it was stubbornly rapid and broad in August.
As inflation continues month after month, the Fed has repeatedly stepped up its response. If raised, the interest rate is 1/4 point in March, 0.5 point in May and 3/4 points at each of the last two meetings. Many economists, as well as investors, think a full percentage point move is possible but unlikely this week.
A big reason for rapidly raising interest rates is to convince businesses and consumers that the central bank is committed to limiting rapid price increases. As workers begin to believe inflation will continue, they may demand higher wages to cover the costs, which employers pass on to their customers in the form of higher prices, setting off an upward spiral.
The Fed recently received good news on that front. Inflation expectations are slowly declining. Michael Feroli, chief US economist at JP Morgan, may be one reason why central banks are opting for a three-quarters point move at this meeting rather than a bigger correction.
“This is not about managing psychology, it’s about slowing down economic activity, which can be done at a more methodical pace,” he said.
As such, Wall Street is likely to pay particular attention to the Fed’s interest rate projections for late 2022 and beyond.
These projections are often called “dot plots”. This is because in this release, the anonymous forecasts of individual policymakers are arranged as blue dots on the graphical plot.official Forecast for June It plans to raise interest rates to 3.4% this year, a figure that has already been nearly achieved, suggesting an upward revision to forecasts.
They also forecast interest rates to rise to 3.8% next year before falling. As inflation drags on, economists expect peak interest rates to rise further.
Understanding Inflation and How It Affects You
The new level will send a signal about how hard the central bank plans to keep the economy in check. Fed officials want to adjust policy with enough momentum to keep inflation in check, but without moving interest rates too far or causing the economy more pain than it needs to.
Getting the right balance can be difficult. It takes time for Fed policy to permeate the economy as a whole. Rate hikes are already starting to weigh on the housing market and overall growth is starting to slow, but it may take time for the full impact of the central bank’s recent moves to be felt.
“The faster the Fed raises rates, the less likely it is to have a soft landing,” Goldberg said. “It’s a lot like realizing you missed the exit on the freeway a mile ago.”
Given that risk and interest rate movements this year, many economists expect the Fed may want to slow down rate hikes soon.
Goldberg expects another three-quarter point move in November and a return to a half-point move in December. Goldman Sachs economists report this week that the Federal Reserve will raise interest rates by half a percentage point at each of its two subsequent meetings, with the Fed Funds Rate in the 4-4.25 range. I wrote that I expected it to be at the end of the year. percent.
A Goldman economist said, “The slowdown will come as fund rates are at higher levels, fears of over-tightening will eventually rise, and lower consumer inflation expectations will reduce concerns about anchoring. ” he said.
But officials have repeatedly hinted that they plan to delay rate hikes and keep borrowing costs at a high, economically restrictive level for some time, even after they eventually stop.
“Monetary policy will need to be restrictive for some time to give confidence that inflation is on target,” said Lael Brainard, vice chairman of the Federal Reserve. rice field. recent speech.
Given that, central banks may also factor lower growth and higher unemployment into their economic forecasts this week, acknowledging that their policies are likely to weigh on the economy.
Investors, once skeptical that the Fed would really hurt the economy, have recently become more concerned about interest rate policy and the economic outlook. A series of grim forecasts could make them reaffirm just how tough central banks’ inflation battles have turned out to be.
“The market is taking them seriously. The Fed is as hawkish as it can be,” said Subhadra Rajappa, head of U.S. rates strategy at Societe Generale.