The Fed is expected to raise rates on Wednesday

The Federal Reserve is racing to get inflation under control and withdraw stimulus from an overheated economy with a double dose of rate hikes expected on Wednesday. The Fed’s monetary policy panel is expected to announce a rate hike of 0.5 percentage points on Wednesday, twice the size of a typical interest rate hike, as the bank rushes to deal with the price increase.

The Fed delayed raising rates from near-zero levels last year as inflation rose, expecting pandemic-related factors driving up prices to fade with COVID-19 . But a combination of a scorching U.S. economy, lingering supply chain issues, the war in Ukraine and billions of stimulus dollars that have fueled a 6.6% rise in prices since last March, according to the the Fed’s favorite inflation indicator.

The Fed is now raising interest rates much faster than in previous cycles, with the bank’s base interest rate range still low enough to stimulate the economy. After rising 0.25 percentage points in March, the Fed’s benchmark range is now pegged at 0.25 to 0.5%, about 1.5 percentage points below what Fed officials said. Fed expect it to be at the end of the year.

The bank aims to raise borrowing costs fast enough to reduce inflation without dragging a strong US economy into recession – a feat economists call a “soft landing”.

“On the surface, everything looks good, at least on the jobs front,” said Derek Tang, co-founder and economist at research firm Monetary Policy Analytics.

The US economy gained nearly 1.7 million jobs in the first three months of 2022 after adding a record 6.4 million jobs last year. Labor Department data released on Friday showed a record 11.5 million job openings in March, nearly two for every unemployed American, and a record 4.5 million Americans quit. their job last month, likely to take a new position with better pay or career opportunities.

“Anyone who wants a job is likely to be able to get a job, although they may not be able to get exactly the job they want,” Tang said.

“These things could change in no time, though, and that’s what the Fed really needs to be careful about, especially in a situation where the global economy is very uncertain.”

Fed Chairman Jerome Powell expressed confidence in the bank’s ability to rein in inflation without forcing companies to lay off employees given the high number of open jobs. If Fed rate hikes reduce job openings without reducing actual employment, job seekers will have less leverage to demand higher wages. Businesses could also find it easier to meet demand as fewer employees quit, which could also reduce pricing pressure.

Despite this, a growing number of economists worry that the Fed may not be able to pull off a soft landing given rising inflation, a low base interest rate range and a number of of global factors that could stand in the way. While most economists expect the United States to avoid a recession this year, many say the risks of a recession in 2023 or 2024 are considerably higher.

COVID-related lockdowns in China have worsened supply shortages, shipping delays and port bottlenecks fueling inflation, with full effects not expected to reach the United States for months. Even if the Fed may reduce consumer demand for these goods, prices may still rise as suppliers struggle to navigate tangled supply chains.

“What you’re trying to do when you slow growth is reduce demand and that drives prices down. How much that can drive prices down when you already have abnormal supply shortages has never been tested before,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics.

“The Fed may be able to make a difference, but the more difference it makes in demand, the more painful the risk of recession becomes. That’s why it’s so difficult.

Petrou is among many Fe watchers who feared the bank ignored clear signs last year that inflation would not be “transient”, as Powell often put it, but had spread in areas of the economy largely untouched by supply chain issues. While most of the initial spike in inflation came from a nationwide shortage of automobiles and computer chips, prices for food, housing, health care and other services rose much faster. these last months.

“I don’t understand what was wrong with their models and I think it’s because they got the answer they wanted, which is a terrible way to think about economics,” said Petrou.

Powell and other Fed officials admitted they had waited too long to start raising interest rates, citing deep uncertainty about whether the delta and omicron variants would delay economic recovery. While Fed pundits largely agree that the bank is behind the curve, many economists have also been caught off guard by the persistence of inflation and hardly fault the bank for being patient.

“You have to remember that we are coming out of a period of great uncertainty. The country has been caught off guard many times,” Tang said, referring to the delta and omicron outbreaks of COVID-19.

“It’s understandable that the Fed has been really, really cautious about the danger of raising rates too soon.”

Leslie M. Gill