The Federal Reserve’s fight against rising prices will accelerate Wednesday when the central bank issues another steep interest rate hike meant to quell stubborn inflation. The Federal Open Market Committee, the panel of Fed officials responsible for setting monetary policy, is on track to raise its baseline interest rate range at the end of a two-day meeting in Washington this week.
While nothing is set in stone, Fed leaders have all but confirmed they will issue another 0.75 percentage point rate hike. That would be the third increase of that size, which Fed Chairman Jerome Powell called “unusually large,” in three consecutive meetings.
Economists and investors are hopeful the Fed will be able to pivot to slower, smaller rate increases after another large September hike. But the Fed has seen little progress so far in cooling inflation.
The economy has shown some signs of slowing down under the weight of higher interest rates and as the shock to energy markets unleashed by the war in Ukraine has dissipated. Gas prices continued to plunge from peaks set in June, supply chains have been running smoother and the weight of rising mortgage payments has slowed the housing market.
Even so, inflation still rose 0.1 percent in August, according to the Labor Department’s consumer price index, led by troubling increases in the costs of shelter, medical services, transportation and food.
“I think we will see more progress soon, so some of it is a matter of just patience,” said Adam Ozimek, chief economist at the Economic Innovation Group, a research nonprofit.
“We’ve seen rates go up very quickly,” he warned, “But the impact hasn’t happened yet.”
Powell and top Fed officials have acknowledged the fight against inflation will bring “pain” as higher interest rates slow the economy, strain household budgets and slow the labor market after years of torrid growth.
Economists have become increasingly concerned the Fed may raise rates to a level where that pain becomes a full-blown recession, with job losses and negative economic growth.
The U.S. economy has remained strong even amid inflation and the strain of higher interest rates, with the country adding more than 2 million jobs since the start of the year and consumer spending well above its pre-pandemic trend. The unemployment rate in August was just 3.7 percent — close to pre-pandemic levels — while layoffs remained historically low.
Diane Swonk, chief economist at audit and consulting firm KPMG, said the Fed’s decision to keep boosting interest rates beyond its current baseline “will be one of the hardest and most politically charged of decisions.”
“The political pressure on the Fed will intensify in the months and weeks to come. Members will become political piñatas. It is not their first rodeo, but this time is truly different as they will be pushing to quell, not just cool, inflation,” Swonk wrote in an analysis last week.
“The housing market is already in a recession with the shoe to drop soon on prices as well as sales and construction.”
Powell has acknowledged the Fed’s fight against inflation could tip the U.S. into a recession and cause severe hardship for millions of Americans. He said that while he’s hopeful the Fed could avoid such a downturn, the economy would face much deeper pain if the bank allowed inflation to become unhinged and plunge the U.S. into a deeper crisis.
The Fed faced serious criticism in 2021 for refusing to raise interest rates while inflation began accelerating, insisting higher rates could short-circuit the recovery. But a combination of supply chain snarls, COVID-19 surges and the war in Ukraine pushed price growth above 8 percent annually this summer, the highest rate in more than 40 years.
“The Fed is stuck in a little bit of a tight spot as a result of their errors in predicting where the economy would go over the last year or two. They consistently underestimated inflationary pressures to a serious degree, and they don’t want to be wrong in the same direction going forward,” Ozimek said.
“They don’t know how high they’re going to have to go or how fast they have to get there. But because they have been consistently wrong for over a year, they don’t feel like they have the luxury of sort of taking it slow and letting the impacts happen and figuring it out.”