The Federal Reserve is expected to raise interest rates sharply in May
The Federal Reserve is widely expected to take a big step this week in its “fast march” to bring its key interest rate down to a more normal level.
Two weeks ago, the president and CEO of the Federal Reserve Bank of San Francisco, Mary Daly, used that word – fast – to describe her route to ending the very accommodative interest rate policy of the Fed it instituted in the early weeks of the pandemic.
The market is certain that the big step will be at least a half of a 1% hike and maybe as much as a three-quarters of a 1% rate hike on Wednesday. If this is the most important step, it would take the Fed’s target short-term borrowing rate to its highest level since February 2020. And it would represent the fastest interest rate hikes ever. for generations.
Make no mistake, the central bank has completely transformed into a full-time inflation-fighting organization.
Critics are complaining that it’s late for the fight, and they’re not wrong. Overall, consumer prices increased by 8% and were stable. Focusing on items whose prices tend to change slowly — rent, home insurance, restaurants — shows a more moderate but still high increase of nearly 5% in March, according to data from the Federal Reserve Bank of Atlanta. .
The Fed gave up hopes that inflation would be transient late last year. After raising its target rate by a mere quarter of a percent in March, central bankers rallied in unison alerting investors and borrowers to expect a bigger move this month, and likely for the next few months. meetings.
There’s more to the rate hike, however. The bank could announce that it is starting to sell bonds it bought during the pandemic in its effort to avoid a deep and disastrous depression. This so-called quantitative tightening will act as another economic pause, further complicating the Fed’s balancing act.
The goal is to eliminate inflation from the economy as quickly as possible without disrupting the continued recovery of the labor market. It is a difficult task to accomplish.
While the Fed may hope to attack monetary contributors to inflation by discouraging consumption, it cannot affect the COVID-19 lockdowns in China, the Russian war in Ukraine or the biological mutation of the coronavirus – which threaten to trip the bank as it picks up its pace of fighting inflation.
Tom Hudson hosts “The Sunshine Economy” on WLRN-FM, where he is vice president of news. Twitter: @HudsonsView