WASHINGTON – The Federal Reserve scrambled to raise interest rates for the third consecutive time on Wednesday in an attempt to squash soaring inflation – but economists worry the campaign increasingly risks a recession by next year.
The Fed raised its key short-term interest rate by three-quarters of a percentage point to a range of 3% to 3.25%, a higher-than-normal level designed to ease inflation by slowing the economy. It has also significantly increased its forecast for what that rate will be at the end of both this year and 2023.
Federal Reserve officials now expect the 2022 key rate to end in a range of 4.25% to 4.5%, a full percentage point higher than the 3.25% to 3.5% they forecast in June, and close next year at 4.5% to 4.75%, according to their median estimate. This suggests that the central bank may agree to a further increase of three-quarters of a point at its meeting in November and then raise the interest rate by half a point in December.
But within the next year or two, as higher rates constrain economic activity, Fed policymakers expect growth to weaken significantly. The central bank expects to cut the federal funds rate by about three-quarters of a point in 2024, most likely in response to a slowing economy or possibly a recession.
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The economy is already declining. In a statement after a two-day meeting, the Federal Reserve said, “Recent indicators point to modest growth in spending and production” but “job gains have been solid… and the unemployment rate has remained low.”
It added that it “expects that continued increases” in the federal funds rate “will be appropriate.”
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Stocks reversed course again, turning positive during Powell’s press conference after falling into negative territory after the announcement.
Stocks gained the most momentum after Powell said the central bank could envision a point at which rate hikes would be paused but cautioned that “we are not there yet.” The Dow Jones Industrial Average was 210 points, or 0.7%, higher as of 2:57 pm ET. The S&P 500 rose 28 points, or 0.7%, and the Nasdaq Composite Index rose 108 points, or 1%.
Two-year Treasury yields are down around 4% after jumping above 4.1% earlier, the highest since 2007.
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Wednesday’s 0.75 percentage point rate increase is expected to reverberate in the economy, driving up rates for credit cards, the home equity line of credit and other loans. 30-year fixed mortgage rates jumped above 6% from 3.22% earlier this year. At the same time, families, especially the elderly, are beginning to reap higher returns on bank savings after years of massive returns.
Barclays says Fed policymakers have no choice but to raise rates again sharply after a report last week revealed that inflation – as measured by the Consumer Price Index (CPI) – rose 8.3% annually in August, below a 40-year high. year in June at 9.1%. But higher than the expected 8%.
Employers also added 315,000 health jobs in August and average hourly wages increased 5.2% annually. This can further drive up prices as companies struggle to maintain profit margins.
Markets trying to predict where interest rates are headed saw an 18% chance that Fed policymakers would raise rates by a full percentage point on Wednesday.
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But Goldman Sachs economist David Merkel said little has changed since Fed Chairman Jerome Powell told reporters in late July that the pace of rate hikes may be slowing to explain the increased risks of a recession. Instead, he says, the Fed is partly trying to get a message out to stock markets that until recently were complacent about the prospect of further rate hikes.
Growth is slowing as the Fed pushes up borrowing costs. The Federal Reserve said Wednesday that it expects the economy to grow just 0.2% this year and 1.2% in 2023, below its June estimate of 1.7% for both years, according to the median estimate of officials.
It expects the unemployment rate to rise 3.7% to 4.4% by the end of next year, well above its previous forecast of 3.9%.
The Fed’s preferred measure of annual inflation – which is different from the CPI – is expected to fall from 6.3% in August to 5.4% by the end of the year, slightly above Fed officials’ previous forecast of 5.2%, and 2.8% by the end of the year. . End of 2023. That would be moderately above the Fed’s 2% target.
Even without significant increases in federal interest rates, inflation is expected to slow as supply chain bottlenecks ease, commodity prices fall, a strong dollar lowers import costs, and retailers offer deep discounts on meager bloated inventories. Despite this, Powell said it is critical for the Fed to raise interest rates to curb consumer inflation expectations, which could affect actual rate increases.
A growing number of economists believe that the Fed’s aggressive campaign – its key rate started in 2022 near zero – will push the economy into recession. Economists say there is a 54% chance of a downturn next year, up from 39% in June, according to a survey by Wolters Kluwer Blue Chip Economic Indicators.
For several months, Federal Reserve Chairman Jerome Powell said he believed the central bank could tame inflation without triggering a recession. But in a speech last month at the Federal Reserve’s annual conference in Jackson Hole, Wyoming, he acknowledged that higher rates and slower growth “will also bring some pain to households and businesses. These are the unfortunate costs of lowering inflation.”
This article originally appeared on USA TODAY: Federal Reserve raises interest rate again to curb inflation; What does that mean to you