Fed likely to bring more economic ‘pain’ with another significant rate hike

The Federal Reserve will escalate its fight against inflation this week with another significant rate hike, causing greater economic “pain” for millions of households and businesses across the country.

With inflation unexpectedly accelerating in August and the job market still growing healthily, the US central bank is widely expected to approve another 75 basis point rate hike at the end of its two-day meeting on Wednesday. Some investors are even betting on a full percentage point move as the Fed faces mounting pressures to contain demand and slow rising consumer prices.

But Wall Street is more focused on the signal from policymakers that it could be next in its inflation battle: The Fed will release its quarterly forecasts beginning in June, which provide insight into where the US economy is headed in the coming years. The projections are expected to show an even more aggressive path of interest rate hikes that are likely to curtail economic growth and push up unemployment.

“The Federal Reserve is probably tightening its policy towards the brink of recession,” said Danielle DiMartino Booth, Quill Intelligence CEO and chief strategist and former adviser to the Dallas Fed. “Many stock investors are hoping for a dovish pivot, but the stock market’s addiction to Fed easing when stocks fall may be a little off. [Federal Reserve Chair] Jerome Powell aims to destroy it by aggressively raising rates in addition to inflation.”

ANOTHER JUMBO FED RATE HIKE ALLOWS TO ADD $2.1T TO NATIONAL DEBT, CRFB SAYS

Federal Reserve Chair Jerome Powell and members of the Federal Reserve will use this week’s reports from the consumer and producer price indices to weigh interest rate hikes by 75 percentage points when the group meets on Sept. 21, 2022. (Liu Jie/Xinhua via Getty Images/Getty Images)

Powell — who will hold a news conference at 2:30 p.m. ET on Wednesday — has taken an increasingly aggressive tone over the past month as the Fed tries to push inflation closer to its 2% target.

In a short but direct address at the Kansas Fed’s annual economic symposium in Jackson Hole, Wyo., last month, Powell emphasized that the Fed is determined to crush inflation, regardless of the potential economic impact of higher interest rates.

“While higher interest rates, slower growth and softer labor market conditions will bring inflation down, they will also cause some pain to households and businesses,” Powell said last month, adding: “We’ll keep going until we’re confident the job is done. is done.”

BILLIONAIRE DAVID RUBENSTEIN WARNS INFLATION WILL BE ‘DIFFICULT’ FOR THE FED TO REDUCE

Central bank policymakers have already approved four consecutive rate hikes, including consecutive 75 basis point hikes in June and July, and have shown no signs of taking the foot off the brakes as inflation remains painfully high.

Federal Reserve

The Marriner S. Eccles Federal Reserve Building in Washington, DC, on July 6, 2022. (Al Drago/Bloomberg via Getty Images/Getty Images)

The current benchmark range of federal funds from 2.25% to 2.50% is around the “neutral” level, meaning it is neither supportive nor constrained economic activity. An increase of three-quarters of a percentage point would bring the range to 3.00% to 3.25%, which is approaching restrictive territory. Investors expect the Fed to keep rates in a restrictive range for some time until there is clear evidence that inflation has declined and will not return.

Goldman Sachs economists see benchmark lending rates peak between 4.25% and 4.5% in 2023, before the Fed cuts rates in 2024 and twice more in 2025. Meanwhile, Citi economists think rates could hit 5% rise as the Fed fights inflation.

US INFLATION EXPECTATIONS FALLING AGAIN IN AUGUST, NEW YORK FED SAYS

“Restoring price stability will probably require a restrictive policy to be maintained for some time,” Powell said in August. “The historical record strongly warns against premature easing of the policy.”

Inflation rose even higher than expected last month, with the consumer price index, a broad measure of the price of everyday goods that includes gasoline, groceries and rent, rising 0.1% in August from the previous month, marking the rise in August. hope for a delay. On a yearly basis, inflation is running at 8.3% – a high of almost 40 years.

But efforts to fight inflation have potential risk of recessionwith a growing number of economists and Wall Street firms forecasting an economic downturn this year or next.

US inflation

A shopper views organic produce at a grocery store in Montebello, California, on Aug. 23, 2022. (Frederic J. Brown/AFP via Getty Images/Getty Images)

Rising interest rates tend to create higher rates on consumer and business loans, slowing the economy by forcing employers to cut spending. Mortgage rates have nearly doubled from a year ago to more than 6.0%, while some credit card issuers have increased their rates to 20%.

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There’s a bright spot in higher interest rates for savers, though: Some banks and credit unions will increase their savings rates during Fed rate hikes, making it a good opportunity for customers — especially retirees living off their savings — to earn more.

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me: DJI DOW JONES AVERAGES 30706.23 -313.45 -1.01%
me:COMP NASDAQ COMPOSITE INDEX 11425.051132 -109.97 -0.95%
SP500 S&P 500 3855.93 -43.96 -1.13%

US stocks plunged Tuesday ahead of the meeting, with the Dow Jones Industrial Average losing 313 points. The S&P 500, meanwhile, fell 1.13%, while the blue-chip heavy Nasdaq Composite fell about 0.95%.