Fed moves towards another major rate hike as inflation continues

WASHINGTON — The Federal Reserve, determined to curb rapid inflation before it becomes a permanent feature of the U.S. economy, is pushing for another three-quarters point hike later this month, even as the economy shows early signs of slowing and fears of a recession . to assemble.

Economic data suggests the United States is on a tough road: consumer confidence has plummeted, the economy could post two quarters of negative growth, new factory orders have fallen and oil and gas commodity prices have fallen sharply this week as investors fear an impending recession.

But that weakening is unlikely to deter central bankers. Some degree of economic slowdown would be welcome news for the Fed – which is actively trying to cool the economy – and a commitment to restore price stability could keep officials on an aggressive policy path.

Inflationary measures are progressing at or near the fastest pace in four decades, and the labor market, while moderating somewhat, remains unusually strong, with 1.9 jobs available for every unemployed worker. Fed policymakers are likely to focus on those factors as they head to their July meeting, especially since their key interest rate — which determines how expensive it is to borrow — is still low enough to encourage economic activity instead. to subtract from it.

Minutes from the Fed’s June meeting, released Wednesday, made it clear that officials are eager to raise interest rates to a point where they are holding back growth as policymakers step up their fight against inflation.

The central bank will announce its next interest rate decision on July 27, and several key data points will be released between now and then, including the latest jobs data for June and updated consumer price index inflation data – so the magnitude of the move isn’t set in stone. But assuming the economy remains strong, inflation remains high and the semblance of moderation remains far from convincing, there could be a major change of course ahead.

Fed chairman Jerome H. Powell has said central bankers will debate a 0.5 or 0.75 percentage point hike at the upcoming meeting, but officials are beginning to rally behind the faster pace of action as the recent economic trends delay.

Loretta J Mester, the president of the Federal Reserve Bank of Cleveland, said during a televised interview last week.

The Fed raised rates by 0.75 percentage points in June, the first move of that magnitude since 1994 and one fueled by growing concerns that rapid inflation hadn’t eased as expected and risk threatening a more permanent feature of the economy. to become.

While the big move came suddenly – investors hadn’t expected such a big change until just before the meeting – policymakers have begun to signal earlier in the decision-making process that they are in favor of a big move in July.

Some of the increased urgency may come from recognizing that the Fed is behind the curve and trying to fight inflation when interest rates, while rising rapidly, remain relatively low, economists say.

“It’s starting to look like 75 is the number,” said Michael Feroli, the chief US economist at JPMorgan Chase. “We would need some serious disappointment to switch back at this meeting.”

Fed interest rates are now set in a range of 1.5 percent to 1.75 percent, which is much higher than the near-zero setting at the start of 2022, but still likely low enough to fuel the economy. Officials have said they want to raise rates “quickly” to the point where they begin to weigh on growth — an estimated rate of about 2.5 percent.

As they see it, “with inflation so high and the labor market tight, there’s no need to add housing at this point,” said Alan Detmeister, senior economist at UBS who spent more than a decade as an economist and section chief on the board. board of the Fed. “That’s why they go up so aggressively.”

Central bankers know a recession is possible as they are raising interest rates quickly, although they have said a recession is not inevitable. But they have indicated that they are willing to inflict some economic pain if it is necessary to curb inflation.

Mr. Powell has repeatedly stressed that whether the Fed can gently slow the economy and cool inflation depends on factors beyond its control, such as the course of the war in Ukraine and the wail of the global supply chain.

For now, it is unlikely that Fed officials will interpret the burgeoning evidence of a cooling economy as a surefire sign that it is tipping into recession. The unemployment rate is hovering at its lowest level in 50 years, the economy has so far created an average of nearly 500,000 jobs a month in 2022 and consumer spending has been relatively strong, although cracking slightly under the weight of inflation.

Meanwhile, officials are discouraged by both the speed and staying power of inflation. The consumer price index measure rose 8.6 percent over the year to May, and several economists said it likely continued to accelerate year-on-year in the June report, to be published July 13. Omair Sharif, the founder of Inflation Insights estimated it could be around 8.8 percent.

“You’ll probably get a few months of moderation after we get this June report,” he said.

Economists say the Fed’s chosen measure of inflation, the personal consumption expenditure index, may have already peaked. But it still rose 6.3 percent for the year through May, more than three times the central bank’s 2 percent target. Many households struggle to keep up with the rising costs of housing, food and transportation.

While there are encouraging signs that inflation could slow down soon – inventories have built up at retailers, global gas prices for commodities have fallen this week and consumer demand for some goods may begin to slow – those indicators will inform central bankers in this stage may be of little consolation .

The Fed has been repeatedly disappointed by false dawn. Officials had hoped inflation peaked last summer, only to accelerate again in the fall. They have regularly received Wall Street predictions that it could hit its peak, but they have yet to prove correct.

And Fed officials are increasingly concerned that they will have to prove their commitment to lowering prices. If Americans come to believe that inflation will remain high year after year — as inflation expectations shift, in Fed terms — they could demand bigger wage increases to cover those projected costs. In turn, companies may get into the habit of constantly charging more to cover higher labor costs, creating a cycle of rising prices.

That would make inflation even harder – and more painful – to stamp out.

Many officials at the June meeting of the Fed’s policy-making committee believed that a significant risk facing the committee now was that elevated inflation could anchor if the public questions the committee’s determination to policy direction where necessary. ‘, according to the minutes released on Wednesday.

That’s part of the rationale behind the Fed’s rapid rate path. Officials have indicated they expect to increase rates to about 3.4 percent by the end of the year as they try to curb price increases. They could achieve that by raising interest rates by 0.75 percentage point at their upcoming meeting in July, 0.5 percentage point in September and 0.25 percentage point in November and December.

“What you would like to do, if we can, is to nip inflation in the bud before it becomes entrenched in the economy,” James Bullard, the president of the Federal Reserve Bank of St. Louis, said during a presentation in Zurich in June. . 24.

That is also the logic to take big steps sooner rather than later. Charles L. Evans, the president of the Federal Reserve Bank of Chicago, told reporters a few days earlier that a move of 0.75 percentage points in July was “a very reasonable place to have a discussion” and likely would be unless inflation would decrease.

The Fed will have new information by the time of its July meeting, but the central bank may prove less sensitive than usual to incoming data in the current environment. Minor updates may not change the picture in which price hikes have been going on for months on end and officials believe expectations of rising inflation could spiral out of control.

“The data they are responding to has piled up over the past year,” said Mr. Feroli from JPMorgan. “It was the realization that they missed the boat on inflation in the past year.”