WASHINGTON (AP) — For months, President Jerome Powell had hoped the Federal Reserve could raise interest rates high enough to curb runaway inflation without pushing the economy into recession.
However, while the Fed is due to announce another hard rate hike soon after this week’s meeting, days after the government released a hard inflation report, the probability of a so-called “soft landing” for the central bank appears to be dwindling.
With inflation at 8.6%, a four-year high, Fed officials are expected to raise borrowing rates more this year than expected just a few weeks ago. By the time its policy meeting ends on Wednesday, the central bank could signal that it could increase the risk of a recession by raising rates to levels that could undermine growth.
Some economists now speculate that the Fed may decide to surprise financial markets this week by raising the short-term base rate by three-quarters for the first time since 1994, instead of half a percentage point last announced by Powell. moon. According to CME Group, Wall Street investors estimate the probability of such a sharp move to be 30%.
Analysts say that even if a recession is averted, the Fed will almost inevitably inflict some pain – most likely in the form of rising unemployment – as the price beats harsh hyperinflation.
“They have to accept that you can’t fight inflation without hurting markets and the economy,” said Ethan Harris, head of global economic research at Bank of America. “We should not disrupt the markets, there is no serious problem here, we will make a soft landing in the economy, I think it is too late for that now. We will make a hard landing,” he said.
The prospects for the Fed to accelerate credit tightening and further increase the cost of borrowing for households and businesses weighed on the stock market on Monday. The broad S&P 500 has entered bear market territory, losing more than 20% of its value since its peak at the beginning of the year.
Fed officials as a group have been slow to understand how inflation will be sustained over the past year, instead believing that large price increases will be temporary. Now they are acting decisively, trying to undo their initial delay.
If politicians raise the short-term base rate by half a percentage point—twice the normal rate—for the second time in a row on Wednesday, the rate will rise in the range of 1.25% to 1.5%. A half-point increase is expected at the Fed meeting to be held at the end of July.
Officials left some uncertainty about what to do next at their meeting in September. Some analysts thought politicians might stop raising rates altogether, after comments from Rafael Bostic, chairman of the Atlanta Federal Reserve Bank, suggested this.
But after Friday’s inflation report showed no signs of expected easing, most analysts are looking for another half-point gain in September. And Goldman Sachs economists said they expect a fifth half-point increase in November.
Last month, Powell put some sort of sign when he said Fed officials would continue to raise interest rates until they see “clear and strong evidence that inflation is falling.” He could clarify what the evidence is at his press conference on Wednesday.
Inflation has permeated nearly every corner of the economy as prices for everything from rent to airline tickets to used cars to clothing and healthcare rose in May.
The rise in oil prices due to Russia’s invasion of Ukraine put the national average above $5 per gallon of gas, according to AAA. This high price undermines consumers’ ability to spend freely, which provides the bulk of economic growth. The cost of energy is also a concern for the Fed, as it can do little to mitigate supply shocks, but its impact cannot be ignored.
Another worry for the Fed came Friday when the University of Michigan’s monthly consumer sentiment survey showed Americans’ expectations for future inflation were rising. This is a warning sign, because expectations can be self-fulfilling: if people expect higher inflation in the future, they will often change their behavior so that prices rise. For example, they can accelerate large purchases before prices rise. It could increase demand and push inflation even higher.
Powell often refers to long-term inflation expectations as “well-fixed” because consumer surveys and financial market indicators have shown that people and investors expect inflation to return to the Fed’s 2% target over the next five years. Low inflationary expectations make it easier for politicians to control price increases.
But a Michigan study found that Americans expect inflation to reach 3.3% within five years, the highest level since 2008 and higher than the 3% forecast in May.
“Raising long-term inflation expectations will change the game for the Fed,” Jefferies investment bank economists Thomas Simons and Aneta Markowska said in an email. As a result, Jefferies economists now predict the Fed will raise interest rates by three-quarters on Wednesday. Barclays economists predict a similar leap forward.
On Wednesday, the Fed will also update its quarterly forecasts. These forecasts are expected to show higher inflation forecasts and interest rates and slower growth this year. Economists also expect the Fed to forecast slightly higher unemployment rates, which was the first to acknowledge that higher rates could impact the labor market.
In March, Fed officials expected base rates to be between 1.75% and 2% by the end of the year. This level is expected to be reached in July.
Krishna Guha, an analyst at investment bank Evercore ISI, believes the Fed rate will be between 2.75% and 3% by the end of this year. At this level, rates are higher than what the Fed calls “neutral”, which is not seen as restrictive or stimulating to growth. Powell acknowledged it’s not clear where neutral is, but the Fed usually assumes it’s at 2.5%.
This week’s meeting will also be the first for President Joe Biden’s two new Fed nominees, Lisa Cook and Philip Jefferson. Cook became the first black woman on the Fed’s Board, while Jefferson was only the fourth black man. Both economists and the Senate have pledged to support the Fed’s efforts to reduce inflation.
Source: Breitbart
