WASHINGTON, United States — The U.S. Federal Reserve is set to make a fourth consecutive key interest rate hike this week as it battles soaring costs, with its aggressive stance fueling expectations of a recession.
US households have been squeezed by soaring consumer prices, pushing economic issues to the forefront of voters’ concerns in the upcoming midterm elections. Fed officials are walking a tightrope in an attempt to rein in prices while avoiding a downturn.
To raise borrowing costs and calm demand, the US central bank has already raised the benchmark policy rate five times this year, including three consecutive increases of 0.75 percentage points.
But with inflation still high and a tight labor market supporting wages and spending, analysts say another 0.75 point hike is all but certain at the next policy meeting of central bankers.
The policy-setting Federal Open Market Committee begins its two-day policy meeting on Tuesday, and all eyes are on signals that it may be ready to wind down its campaign in the coming months.
The focus will be on whether the committee is confident it is “on track” towards a policy that is tight enough to manage inflation risks, according to Barclays analysis.
Many economists expect the Fed to raise rates another half point again in December.
Federal Reserve Chairman Jerome Powell has made it clear there is no ‘painless way’ to cool the economy and avoid a repeat of the last time US inflation spiraled out of control in the 1970s and early 1980s.
It took aggressive policy action and a recession to bring prices down, and the Fed is unwilling to give up its hard-won inflation-fighting credibility.
“We’ve been told time and time again that the Fed will continue to raise rates aggressively until it sees ‘convincing’ evidence that inflation is slowing,” said Nancy Vanden Houten, US economist at Oxford Economics. .
“I don’t think the data meets that standard so far,” she told AFP.
The Fed’s actions have trickled down to the economy, with mortgage rates recently hitting their highest level in decades and home sales falling.
Further Fed hikes should also dampen consumer and business spending, making them more attractive to save than spend.
Analysts warn that the economy could slip into recession in 2023 as Fed rate hikes, inflation and a global slowdown in growth hit.
Some Fed officials have expressed concern about excessive policy tightening, wanting to consider a slower pace of rate hikes or even a pause to assess the impact of current moves, Vanden Houten said.
In October, San Francisco Fed President Mary Daly told an event that policymakers should start planning for a reduction in the magnitude of rate hikes, even if it is not yet time. to step back, while Chicago Fed President Charles Evans separately noted that “overshoot is expensive.”
He added that there is uncertainty as to how the restrictive policy should become.
While St. Louis Fed President James Bullard, who has argued for an acceleration in policy hikes, has hinted at a possible pause next year, others reiterated their intention to keep raising rates until there are signs that inflation is contained.
“This divide reflects the positioning for a debate over the direction of policy in the months ahead,” Barclays analysts said.
The central bank’s benchmark rate is currently within a target range of 3% to 3.25%.
Even with lower gasoline prices, consumer prices aren’t letting up – with a core measure that wipes out the volatile food and energy segments hitting a 40-year high in September.
Policymakers are not just concerned about high inflation, but that a mindset of continuously rising prices will set in, leading to a dangerous spiral and a phenomenon called stagflation.
This fear prompted the Fed to accelerate its rate hikes rather than follow the more usual course of small, gradual steps over a longer period.