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Rate hikes could slow, but inflation is barely fighting

WASHINGTON — Federal Reserve Chairman Jerome Powell on Wednesday sought to strike a delicate balance at a time when high inflation plagues the national economy and plays a central role in the midterm elections.

Powell suggested that the Fed could decide in the coming months to slow down its aggressive interest rate hikes. Yet he also made it clear that the Fed is not even close to declaring victory in its fight to rein in an inflation rate that is near four-decade highs and has shown few signs of ebbing.

When the Fed ended its last policy meeting on Wednesday, it announced it was raising its benchmark rate by a substantial three-quarters of a point for the fourth consecutive time. Its key rate is now in a range of 3.75% to 4%, the highest for 15 years.

It was the central bank’s sixth rate hike this year – a streak that has made mortgages and other consumer and business loans increasingly expensive and heightened the risk of recession.

The statement released by the Fed suggested that it would begin to take a more deliberate approach to rate hikes, which would likely lead to lower increases in borrowing costs. In doing so, he would consider that rate hikes take time to trickle down to the economy and achieve their objective of slowing inflation.

Financial markets initially cheered the idea that the Fed may soon decide to slow its hikes, with stock and bond prices soaring higher.

Still, as his press conference got underway, Powell took a tougher line. He pointed out that Fed policymakers have seen little progress in their efforts to control inflation and are likely to send rates even higher than they thought at their last meeting in September.

“We still have a long way to go,” he said. “Data received since our last meeting suggests ‘officials may need to raise rates above the 4.6% they forecast in September.

The Fed Chairman pointedly pointed out that it would be “very premature” to even think about stopping rate hikes. Inflationary pressures, he said, remain far too high.

The sudden change in tone gave financial markets a boost. Stocks reversed their gains sharply and fell as markets closed. The Dow Jones Industrial Average ended the day down more than 500 points, or about 1.5%.

“I think he achieved his goal” of hitting hawkish and dovish notes, said Vince Reinhart, chief economist at Dreyfus and Mellon. (“Hawks” generally prefer higher rates to fight inflation, while “doves” often lean more toward lower rates to support hiring.) “That’s why the market was so confused. “

The Fed meeting came as financial markets and many economists grew nervous that Powell would end up getting the central bank to raise borrowing costs more than needed to keep inflation under control and will cause a painful recession in the process.

Powell implicitly addressed those fears during his press conference. He left the door open for a downgrade to a half-point hike at the Fed’s next meeting in December. The central bank could then pull back even further from a quarter-point hike – a more typical size rate hike – early next year.

“At some point,” he said, “it will become appropriate to slow down the pace of increases. So that time is coming, and it could come as soon as the next meeting or the one after. No decision has been made. was taken.”

At the same time, Powell noted that the labor market remains strong, which means many companies have to raise wages to keep workers – increases that are often passed on to consumers in the form of higher prices.

This week, the government reported that companies posted more job vacancies in September than in August. There are now 1.9 jobs available for every unemployed person, an exceptionally large supply, which is also fueling larger wage increases and adding to inflationary pressures.

Overall, Powell said the Fed has made little headway against inflation so far.

“We think we have a long way to go, we have some ground to cover with interest rates,” he continued, “before we get to that level of interest rates that we think is good enough. restrictive”.

Continued inflated prices and higher borrowing costs are putting pressure on U.S. households and have undermined the ability of Democrats to campaign on the health of the labor market as they try to retain control of Congress. Republican candidates have hammered Democrats on the punitive impact of inflation ahead of the midterm elections that end on Tuesday.

“Chair Powell has stuck to this two-pronged message: we are not done yet, due to high inflation and a firm commitment to bring it down,” wrote Sal Guatieri, senior economist at BMO. Capital Markets Economics, in a footnote. “But we may not need to aggressively hold start-up rates, given an economy that has slowed significantly from last year and long-term inflation expectations that are still “well anchored”.

Typically, the Fed raises rates in quarter-point increments. But after miscalculating by playing down inflation last year as likely transitory, Powell led the Fed to raise rates aggressively in an attempt to slow borrowing and spending and ease pressures on investors. price.

The average rate on a 30-year fixed mortgage, at just 3.14% a year ago, rose above 7% last week, mortgage buyer Freddie Mac reported. Sales of existing homes have fallen for eight consecutive months.

Still, policymakers may think they can slow the pace of their rate hikes soon, as some early signs suggest inflation could start to ease in 2023. Consumer spending, squeezed by high prices and lending more expensive, hardly increase. Supply chain issues ease, which means fewer shortages of goods and parts. Wage growth is plateauing which, if followed by declines, would reduce inflationary pressures.

Outside of the United States, many other major central banks are also rapidly raising rates in an attempt to quell inflation levels that are even higher than in the United States.

Last week, the European Central Bank announced its second consecutive rate hike, raising rates at the fastest pace in the history of the euro in an attempt to rein in inflation which has hit a record 10.7% last month.

Similarly, the Bank of England is expected to raise rates on Thursday in an attempt to ease consumer prices, which rose at their fastest pace in 40 years at 10.1% in September. Even as they raise rates to fight inflation, Europe and the UK appear to be sliding into recession.

startribune Gt Itly

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