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/ Wednesday, July 27, 2022
Fed set to impose another big rate hike to fight inflation
The Fed’s moves will make borrowing costlier for individuals and companies Christopher Rugaber –The Associated Press
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ASHINGTON — Conflicting signs about the health of the U.S. economy have thrust the Federal Reserve into a difficult spot. With inflation raging at a four-decade high, the job market strong and consumer spending still solid, the Fed is under pressure to raise interest rates aggressively. But other signs suggest the economy is slowing and might even have shrunk in the first half of the year. Such evidence would typically lead the Fed to Federal Reserve Chairman Jerome Powell speaks to the Senate Banking, Housing and Urban Affairs Committee. stop raising rates — or even cut them. >AP Photo/Manuel Balce Ceneta, File For now, though, the Fed is focused squarely on its inflation fight, and this week it’s set to announce can slow growth just enough to tame inflation yet another hefty hike in its benchmark interest rate. not so much as to trigger a recession — a risk that Together with its previous rate increases, the Fed’s many analysts fear may end badly. moves will make borrowing costlier for individuals The Fed’s rate hikes aren’t suited to address and companies and likely weaken the economy all the causes of high inflation. Higher borrowing over time. rates can reduce spending. But they cannot “Until there’s very clear evidence of the labor reverse other factors, notably the global shortages market beginning to meaningfully deteriorate, of food, energy, factory parts and other items, the No. 1 focus for the Fed must be inflation,” which have been worsened by Russia’s war against said Matthew Luzzetti, chief U.S. Ukraine and COVID-19-related economist at Deutsche Bank. shutdowns in China. After its policy meeting It will also likely take months Matthew Luzzetti, chief U.S. economist, Wednesday, the Fed is expected for the Fed’s higher rates to Deutsche Bank. to impose a second consecutive reduce spending on airline flights, three-quarter-point hike, restaurant meals and other The central elevating its key rate to a range of services. Many economists worry bank is betting it 2.25% to 2.5%. It will be its fourth some measures the economy is barely growing, that this means the Fed will have can slow growth rate hike since March, when if at all. When the government reports Thursday to clamp down even harder on just enough to it announced a quarter-point on growth in the April-June period, it may show consumer and business demand, tame inflation yet increase. Since then, with inflation that the economy shrank for a second consecutive to bring it into balance with the not so much as to setting new four-decade highs, quarter. economy’s restricted supply of trigger a recession. the central bank has tightened Though two straight quarters of negative growth goods and labor. credit ever more aggressively. are sometimes seen as an informal definition of The nation’s June jobs report By raising borrowing rates, the recession, few economists think the economy is in showed that hiring has remained Fed makes it costlier to take out a downturn. Instead, recessions are defined by the healthy, with employers adding a mortgage or an auto or business loan. In turn, National Bureau of Economic Research, a nonprofit 372,000 jobs last month. Employers’ continued consumers and businesses will likely borrow and group of economists. The NBER assesses a broad need for labor has been elevating wages and spend less, cooling the economy and slowing price range of data in determining recessions and places contributing to inflation as companies pass their increases. The Fed’s hikes have already led to a heavy weight on incomes and jobs. Economists higher labor costs on to customers in the form of doubling of the average rate on a 30-year fixed note that employers have added 2.7 million jobs so price increases. mortgage in the past year, to 5.5%, and home far this year, which points to an economy far from Oddly enough, though, despite the robust job sales have tumbled. The central bank is betting it recession. market and its role in keeping inflation high, by
In fact,
Until there’s very clear evidence of the labor market beginning to meaningfully deteriorate, the No. 1 focus for the Fed must be inflation.
