The Federal Reserve is expected to make its third super-large interest rate hike in a row this week as it mounts its most aggressive fight against inflation since the 1980s — and it could signal more to come.
Central bankers are widely expected to raise interest rates by three-quarters of a percentage point at their meeting on Wednesday, and investors think there is even a slight chance of a full percentage point move.
But Wall Street is more focused on what comes next. Officials will release updated economic forecasts for the first time since June after their two-day meeting this week. Those rates are expected to show a more assertive path forward than Fed officials previously expected as America continues to be plagued by rapid inflation. The question is how much more assertive the Fed will be.
Central bankers have already raised interest rates significantly in an effort to slow the economy and dampen price rises. In response, business activity is slowing but not falling off a cliff: Employers are continuing to hire, wages are rising and inflation remains stubbornly fast.
That has prompted officials to emphasize in speeches that they are serious about bringing price increases under control, even if it comes at a cost to growth and the labor market. It’s an inflation-focused tone that many on Wall Street are calling “hawkish.”
Economic projections could give policymakers an opportunity to emphasize this commitment.
“Things are not going as expected — they’re having trouble slowing the economy,” said Gennadiy Goldberg, U.S. rates strategist at TD Securities. “At the end of the day, there’s very little they can do this week, but they sound like hawks.”
Jerome H. Powell, the Fed chairman, will hold a press conference after the release and is likely to repeat his pledge from late last month to do whatever it takes to keep rates lower.
That could be a painful process, Mr. Powell admitted. Higher interest rates dampen inflation by making it more expensive to borrow money, which discourages both consumption and business expansion. This weighs on wage growth and may even push unemployment higher. In a slowing economy, firms can’t charge as much and inflation is cooling.
“While higher interest rates, slower growth and softer labor market conditions will reduce inflation, they will also bring some pain to households and businesses,” Mr Powell said last month. He later added, “We’re going to keep doing it until we’re sure the job is done.”
If the Fed continues to raise rates along the trajectory that economists and investors increasingly expect, the impact could be painful. In the early 1980s, the last time inflation was as high as it is today, the central bank under Paul A. Volcker jerky borrowing costs sharply higher and plunged the economy into a recession that sent unemployment to double-digit levels. Home builders mailed to Mr. Volcker two by fours of the buildings they could not build; car dealers he sent the keys from cars they couldn’t sell.
Inflation FAQ
What is inflation Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual change in the prices of everyday goods and services such as food, furniture, clothing, transport and toys.
This year’s rate increase is not so significant. The Fed has raised rates from near zero in March to a range of 2.25 percent to 2.5 percent, and an expected move this week would push that to 3 percent to 3.25 percent. If the central bank raises rates by as much as investors expect in the coming months, it will end the year well above 4 percent. In the 1980s, rates jumped to about 19 percent from 9 percent.
Still, four full percentage points of rate hikes in 10 months would be the fastest policy adjustment since Mr. Volcker’s campaign — and while Fed policymakers hoped they could slow the economy gently without causing a painful recession, economists warned that a benign outcome was increasingly unlikely.
This central bank emphasized that it has an obligation to bring inflation back under control.
The Fed has two economic goals: maximum employment and stable inflation around 2 percent. While unemployment is currently very low, prices are rising more than three times target rate based on the Fed’s preferred measure a remained stubbornly fast and wide in August.
As inflation persisted month after month, the Fed repeatedly stepped up its response. If rates rise a quarter point in March, a half point in May and three quarters of a point in each of the last two sessions. Like investors, many economists think a full percentage point move this week is possible but not likely.
A big reason for raising rates quickly is to convince businesses and consumers that the central bank is determined to rein in rapid price growth. If workers begin to believe that inflation will last, they may push for higher wages to cover their costs, which employers will then pass on to customers in the form of higher prices, starting an upward spiral.
The Fed recently received good news in this area: inflation expectations are easing slightly. That may be one reason the central bank is opting for a three-quarter move at this meeting rather than a larger adjustment, said Michael Feroli, chief U.S. economist at JP Morgan.
“It’s not about managing psychology – it’s about slowing down economic activity, which can be done at a more methodical pace,” he said.
That’s why Wall Street is likely to be particularly tuned in to the Fed’s interest rate forecasts for the rest of 2022 and beyond.
These projections are often called a “scatter chart” because the report shows the anonymous predictions of individual politicians lined up as blue dots on a graphical chart. Officials forecast in June that they will raise interest rates to 3.4 percent this year – a figure they have almost reached, suggesting an upward revision to the forecast.
They also predicted they would raise interest rates to 3.8 percent next year before cutting them back. As inflation persists, economists expect the top rate to move higher.
Understand inflation and how it affects you
The new level will send a signal about how strongly the central bank plans to intervene in the economy. Fed officials want to adjust policy sharply enough to get inflation under control, but without overdoing their rate moves and causing the economy more pain than necessary.
Getting the balance right can be difficult. Fed policy takes time to permeate the economy. While rate hikes have already started to weigh on the housing market and overall growth is starting to slow, it may take some time for the full impact of the central bank’s recent moves to show.
“The faster the Fed raises rates, the less likely a soft landing will be,” Mr. Goldberg said, because officials are not waiting to see how their moves play out. “It’s a lot like realizing you missed a freeway exit a mile back.”
Given that risk and how much rates have moved this year, many economists expect the Fed may want to slow hikes soon.
Mr. Goldberg expects one more three-quarter point move in November and then a drop to a half point move in December. Economists at Goldman Sachs wrote in a note this week that they expected the Fed to raise interest rates by half a point in each of the next two meetings after this one, leaving the federal funds rate to end the year in a range of 4 to 4.25. percent.
The slowdown will come “as the funds rate will be at a higher level, concerns about too much tightening will eventually grow, and a decline in consumer inflation expectations should reduce anchoring concerns,” Goldman economists wrote.
But officials have repeatedly signaled that even after they slow and eventually halt rate hikes, they plan to keep borrowing costs high and constricting the economy for some time.
“Monetary policy will need to be tight for some time to provide confidence that inflation is coming down to the target,” said Lael Brainard, the Fed’s vice chairman. recent speech.
As such, central bankers may also include lower growth and higher unemployment in their economic forecasts this week, recognizing that their policies are likely to weigh on the economy.
Investors, who at times doubted whether the Fed would actually hurt the economy, have recently become more interested in interest rate policy and the economic outlook. A gloomy set of projections could reaffirm to them just how tough the central bank’s fight against inflation has become.
“The market has taken them seriously,” said Subadra Rajappa, head of U.S. rates strategy at Société Générale. “The Fed was as hawkish as can be.