Fed lifts interest rate anew, says more hikes to come

WASHINGTON, D.C.: Intensifying its fiGHT AGAINST HIGH INflATION, THE FEDERAL RESERVE (FED) ON WEDNESDAY (THURSDAY IN MANILA) RAISED ITS KEY INTEREST RATE BY A SUBSTANTIAL THREE-QUARTERS OF A POINT FOR A THIRD STRAIGHT TIME AND SIGNALED MORE LARGE RATE HIKES TO COME — AN AGGRESSIVE PACE THAT WILL HEIGHTEN THE RISK OF AN EVENTUAL RECESSION.

The United States central bank’s move boosted its benchmark shortterm rate, which affects many consumer and business loans, to a range of 3 percent to 3.25 percent, the highest since early 2008.

Fed officials also forecast that they would further raise their benchmark rate to roughly 4.4 percent by year’s end, a full point higher than they had envisioned as recently as June. And they expect to raise the rate again next year to about 4.6 percent. That would be the highest since 2007.

By raising borrowing rates, the Fed makes it costlier to take out a mortgage or an automobile or business loan. Consumers and businesses then presumably borrow and spend less, cooling the economy and slowing inflation.

Falling gasoline prices have slightly lowered headline inflation, which was a still-painful 8.3 percent in August compared with a year earlier. Those declining prices at the gas pump might have contributed to a recent rise in US President Joe Biden’s public approval ratings, which Democrats hope would boost their prospects in November’s midterm elections.

During a news conference, Fed Chairman Jerome Powell said that before Fed officials would consider halting their rate hikes, they would “want to be very confident that inflation is moving back down” to their 2-percent target.

The strength of the job market is fueling pay gains that are helping drive up inflation, he added.

He also stressed his belief that curbing inflation was vital to ensuring the long-term health of the job market.

“If we want to light the way to another period of a very strong labor market,” Powell said, “we have got to get inflation behind us. I wish there was [a] painless way to do that. There isn’t.”

Fed officials have said they are seeking a “soft landing,” by which they would manage to slow growth enough to tame inflation, but not so much as to trigger a recession. Yet most economists are skeptical. They say they think the Fed’s steep rate hikes would lead, over time, to job cuts, rising unemployment and a full-blown recession late this year or early next year.

“No one knows whether this process will lead to a recession, or if so, how significant that recession would be,” Powell said. “That’s going to depend on how quickly we bring down inflation.”

In their updated economic forecasts, the Fed’s policymakers project that economic growth would remain weak for the next few years, with rising unemployment. They expect the jobless rate to reach 4.4 percent by the end of 2023, up from the current 3.7 percent. Historically, economists say, any time unemployment has risen by a half-point over several months, a recession has always followed.

Fed officials now foresee the economy expanding just 0.2 percent this year, sharply lower than their forecast of 1.7 percent three months ago. And they envision sluggish growth below 2 percent from 2023 through 2025.

Even with the steep rate hikes the Fed foresees, it still expects core inflation — which excludes the volatile food and gas categories — to be 3.1 percent at the end of next year, well above its 2-percent target.

Powell acknowledged in a speech last month that the Fed’s moves would “bring some pain” to households and businesses. He added that the central bank’s commitment to bringing inflation back down to its 2-percent target was “unconditional.”

Short-term rates at a level the Fed is now envisioning would make a recession likelier next year by sharply raising the costs of mortgages, car loans and business loans.

Inflation now appears increasingly fueled by higher wages and by consumers’ steady desire to spend and less by the supply shortages that had bedeviled the economy during the coronavirus pandemic-fueled recession.