WASHINGTON — The Federal Reserve continued with a third straight rate hike on Wednesday in an effort to crush high 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 percent to 3.25 percent, a higher-than-normal level designed to ease inflation by slowing the economy. It also significantly raised its forecast for what that rate will be at the end of both this year and 2023.
Fed officials now forecast the key rate will end 2022 in a range of 4.25% to 4.5%, a full percentage point above the 3.25% to 3.5% they forecast in June, and end next year at 4.5% to 4.75%, according to their average estimate. That suggests the central bank could approve another three-quarter point hike at its November meeting and then a half-point increase in December.
But within the next year or two, as higher rates curb economic activity, Fed policymakers expect growth to weaken significantly. The central bank expects to cut the fed funds rate by about three-quarters of a point in 2024, possibly in response to a slowing economy or a possible recession.
Impact on you when rates rise: Here’s how it can hit your wallet and portfolio
At a news conference, Chairman Jerome Powell said the Fed’s primary goal is to reduce high inflation. “We can’t help it,” he said.
But he said achieving that would likely mean some pain for the economy and millions of Americans.
“I think there is a very high probability that we will have a period of … much lower growth and that could lead to an increase in unemployment,” he said.
Will this mean a recession?
“No one knows whether this process will lead to a recession or how significant the recession will be,” Powell said. “I don’t know the odds.”
His comments marked a marked change in tone from just a few months ago, when he expressed confidence that the Fed could raise rates to fight inflation without triggering a downturn.
Still, he said, “We haven’t given up on the idea that we could have a very modest increase in unemployment.”
The economy is already pulling back. In a statement after the two-day meeting, the Fed said: “Recent indicators point to modest growth in spending and output,” but “job gains have been solid … and the unemployment rate remains low.”
He added that he “expects that the current increases” in the federal funds rate “will be appropriate.”
2-year yields on government bonds and stocks react
Stocks ended the day lower, with the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite all down about 1.7%. Stocks experienced high levels of volatility after the Fed announcement, swinging between gains and losses multiple times in recent trading hours.
The yield on 2-year government bonds was above 4%, the highest level since 2007, signaling that investors believe the fight to contain inflation will be prolonged.
What was the Fed rate hike today?
Wednesday’s rate hike of 0.75 percentage points is expected to ripple through the economy, raising rates for credit cards, home equity lines of credit and other loans. Fixed 30-year mortgage rates jumped above 6% from 3.22% earlier this year. At the same time, households, especially the elderly, are finally reaping higher returns from bank savings after years of low returns.
Barclays says Fed policymakers have had little choice but to raise interest rates sharply again after a report last week revealed that inflation – as measured by the consumer price index (CPI) – rose 8.3% year-on-year in August, below June’s 40-year peak of 9.1% but above expectations of 8%.
Also, employers added a healthy 315,000 jobs in August, and average hourly wages increased by a solid 5.2% year over year. This could spur further price increases as companies struggle to maintain profit margins.
Markets trying to predict where rates are headed believe there is an 18 percent chance Fed policymakers will raise rates by a full percentage point on Wednesday.
Are we in recession in 2022?
But Goldman Sachs economist David Mericle says little has changed since Fed Chairman Jerome Powell told reporters in late July that the pace of rate hikes would likely slow to account for the increased risk of a recession. Rather, he says, the Fed is in part trying to send a message to stock markets that until recently have been complacent about the prospect of more rate hikes.
Growth is slowing as the Fed raises borrowing costs. The Federal Reserve said on Wednesday it expected the economy to grow just 0.2 percent this year and 1.2 percent in 2023, below its June estimate of 1.7 percent over both years, according to the median estimate of officials .
It forecast that unemployment, from 3.7%, would rise to 4.4% by the end of next year, well above the previous forecast of 3.9%.
And 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 staff’s previous forecast of 5.2% and 2.8% by the end of 2023. That would be modestly above the Fed’s 2% target.
Even without big interest rate hikes from the Federal Reserve, inflation is expected to slow as supply chain bottlenecks ease, commodity prices fall, a strong dollar lowers import costs and retailers offer deep discounts to cut of bloated stocks. However, Powell said it was critical for the Fed to raise interest rates to lower consumer inflation expectations, which could affect actual price increases.
He also said on Wednesday that improving supply problems have so far not dampened rate hikes as the Fed had expected. “Inflation hasn’t really come down” as a result of those gains.
A growing number of economists believe that the Federal Reserve’s aggressive campaign — its key interest rate began in 2022 near zero — will tip the economy into recession. Economists say there is a 54 percent chance of a contraction next year, compared with 39 percent in June, according to a survey by Wolters Kluwer Blue Chip Economic Indicators.
For months, Fed Chairman Jerome Powell has said he believes the central bank can tame inflation without triggering a recession. But in a speech last month at the Fed’s annual conference in Jackson Hole, Wyoming, he acknowledged that higher interest rates and slower growth “will bring some pain to households and businesses. These are the unpleasant costs of reducing inflation.
Nationwide economist Ben Ayers said, “The Fed sent another clear message in September that its fight against inflation is not over.”
This article originally appeared on USA TODAY: Fed Raises Interest Rate Again To Curb Inflation; what it means to you