Hike rates

The Fed will raise rates by 0.75 percentage points to fight inflation

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The Federal Reserve is set to raise interest rates by 0.75 percentage points on Wednesday for the fourth time this year the latest sign of the aggressiveness with which the authorities are fighting to slow the economy, even as the risks of a recession next year increase.

Fed officials show no signs of backing down, and they have clearly stated that to bring consumer prices down from the highest inflation rates in 40 years will require pain for households and businesses. But what’s unclear is when or how central bankers will decide to ease – and whether they’ll only cut once it’s already done. too late to avoid a slowdown. The central bank is is expected to raise rates again at upcoming meetings in December and February, before possibly pausing.

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“What’s really going to matter from this meeting is what’s reported about the next four months,” said Michael Strain, director of economic policy studies at the right-wing American Enterprise Institute. “Should we expect a longer break? … How long was the break going to last in the first place? It looks like we are already changing the crunch cycle settings. But we’re supposed to measure that against a totally vague and unclear baseline.

The Fed has already raised rates five times this year – the last three to 0.75 percentage points, which was once considered unusually high. The bank is evolving at a level of intensity not seen in decades. Yet this struggle is drawing growing criticism from economists and lawmakers that the Fed is overcorrection. Rate hikes take months to fully sink into the economy, and the growing fear is that the Fed is overextending itself to assess whether its policies are working. Even if the bank stopped raising rates, decisions that its leaders have already made could come with a thump next year and disrupt the global financial system along the way.

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Fed officials will announce their interest rate decision at 2 p.m. ET at the end of their two-day policy meeting. At 2:30 p.m., Federal Reserve Chairman Jerome H. Powell will hold a press conference where he will face questions about the inflation outlook, the labor market, recession risks and future rate hikes. The Fed’s own projectionns show a possible half-percentage-point upside at the next meeting in December, followed by a smaller upside in early 2023. Powell will likely be in a hurry to find out how policymakers will arrive at these decisions, especially that inflation remains stubbornly high.

Central bankers often say in public remarks that they need to see clear and consistent evidence that inflation is falling and becoming less entrenched in American lives before changing course. But they haven’t seen anything close to that kind of progress yet. Rates in September rose 8.2% from a year earlier and 0.4% from August, more than analysts’ expectations. Core inflation, a closely watched measure by the Fed that excludes the most volatile categories such as food and energy, also came in strong.

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Wednesday’s planned hike would take the Fed’s key rate, known as the federal funds rate, to between 3.75 and 4%. This is considered “restrictive territory”, where interest rates directly slow the economy by making all kinds of borrowing more expensive, from mortgages to business loans. Economists and Fed watchers also note that Fed decisions are also being magnified as central banks around the world rate of increase tame inflation, a precarious experiment that could soon plunge the world economy into recession.

“We’re very aware of what’s happening in other economies around the world and what that means for us, and vice versa,” Powell said. said when the Fed lifted rates in September. “The forecasts that we make, that our staff make, and that we make ourselves always try to take all of that into account.”

The challenge is compounded by the fact that interest rates are blunt and only target demand in the economy. They can’t do anything to fix failed supply chains, calm oil markets, or get people back to work. Some sectors are extremely sensitive to interest rates; the housing market has slowed considerably mortgage rates increase to 7%. But Powell will have to explain how he expects the Fed’s measures to start working in other sectors as well.

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Through it all, the the job market remains remarkably resilient and continues to spin. The unemployment rate is low at 3.5% and employers are still eager to hire new workers, the number of Jobs rising in September to 10.7 million. Yet that’s the opposite of what Fed officials want to see, as they argue they can stage a “soft landing” if companies eliminate job vacancies rather than lay off.

Outside of the Fed, inflation has become a major issue for voters and candidates ahead of the midterm elections. Republicans hammered Democrats for their sprawling stimulus aid at the start of the pandemic that helped supercharge demand and drive up inflation. Democrats, meanwhile, defend their policies as breathing new life into the labor market.

The Fed closely guards its independence from politics and makes decisions regardless of which party holds Congress or the White House. But Democrats on Capitol Hill recently intensified their criticism from the central bank, arguing that such massive rate hikes will inevitably hurt the labor market. On Monday, 11 lawmakers, including Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.), posted a letter to Powell warning the Fed not to inflict unnecessary damage.

“We are deeply concerned that your interest rate hikes may slow the economy while failing to slow rising prices that continue to hurt families,” the letter read.