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Fed heads for another big rate hike as inflation persists


WASHINGTON — The Federal Reserve, determined to stifle rapid inflation before it becomes a permanent feature of the U.S. economy, is heading for another three-quarter-point interest rate hike later this month. , even as the economy shows early signs of slowing and recession fears mount.

Economic data suggests that the United States could be heading for a difficult road: consumer confidence has fallen, the economy could post two consecutive quarters of negative growth, new factory orders have fallen and the prices of Oil and gas bases have fallen sharply this week as investors fear an impending downturn.

But this weakening should not deter central bankers. Some economic slowdown would be good news for the Fed – which is actively trying to cool the economy – and a commitment to restoring price stability could keep officials on an aggressive policy track.

Inflation measures are working at or near their fastest pace in four decades, and the labor market, while moderating somewhat, remains exceptionally strong, with 1.9 jobs available for every unemployed person. Fed policymakers will likely focus on these factors as they head into their July meeting, particularly because their key interest rate — which determines the cost of borrowing money — is still low enough to stimulate economic activity rather than subtract it. .

Minutes from the Fed’s June meeting, released on Wednesday, made it clear that officials are eager to raise rates to a point where they are weighing on growth as policymakers step up their fight against the inflation.

The central bank will announce its next rate decision on July 27, and several key data points are expected to be released by then, including the latest jobs numbers for June and updated inflation numbers from the consumer price index – so the magnitude of the move isn’t set in stone. But assuming the economy stays strong, inflation stays elevated and glimmers of moderation remain far from conclusive, a major rate move may well be in store.

Fed Chairman Jerome H. Powell said central bankers would debate a 0.50 to 0.75 percentage point hike at the next rally, but officials have started to line up behind the pace faster action if recent economic trends continue.

“If conditions were exactly as they were today for this meeting – if the meeting was today – I would favor 75 because I haven’t seen the kind of numbers on the inflation side that I have. need to see,” Loretta J Mester, the president of the Federal Reserve Bank of Cleveland, said in a television interview last week.

The Fed raised interest rates by 0.75 percentage points in June, its first move of this magnitude since 1994 and fueled by growing concern that rapid inflation has failed to subside as expected and risked becoming a more permanent feature of the economy.

While the sharp rise came suddenly – investors hadn’t expected such a big change until just before the meeting – policymakers started signaling earlier in the decision-making process that they favored a increase in July.

Some of the heightened urgency may come from the recognition that the Fed is lagging the curve and trying to fight inflation at a time when interest rates, while rising rapidly, remain relatively low, said economists.

“It’s starting to look like 75, that’s the number,” said Michael Feroli, chief US economist at JPMorgan Chase. “We would need a serious disappointment for them to downgrade at this meeting.”

Fed interest rates are now set in a range of 1.5-1.75%, well above where they were near zero at the start of 2022, but still likely low enough to fuel the economy. . Officials said they want to raise rates “rapidly” to the point where they begin to weigh on growth – what they estimate to be a rate of around 2.5%.

The way they see it, “with such high inflation, with such a tight labor market, there’s no need to add housing at this point,” said Alan Detmeister, senior economist at UBS who spent more than a decade as an economist and section chief on the Fed Board of Governors. “That’s why they are advancing so aggressively.”

Central bankers know a recession is a possibility as they are rapidly raising interest rates, although they have said it is not inevitable. But they have signaled that they are prepared to inflict economic hardship if that is what is necessary to fight inflation.

Powell has repeatedly stressed that the Fed’s ability to gently slow the economy and calm inflation will depend on factors beyond its control, such as the trajectory of the war in Ukraine and the supply chain issues. global supply.

For now, Fed officials are unlikely to interpret emerging signs of a slowing economy as a sure sign that it is tipping into recession. The jobless rate is near a 50-year low, the economy has gained an average of almost 500,000 jobs per month so far in 2022, and consumer spending – although creaking slightly below the weight of inflation – have been relatively strong.

Meanwhile, officials have been unnerved by both the speed and resilience of inflation. The consumer price index measure rose 8.6% in the year to May, and several economists said it likely continued to accelerate on a yearly basis in the June report, which is expected to be released on July 13. Omair Sharif, the founder of Inflation Insights, estimated that it could reach around 8.8%.

“You probably get a few months of moderation after getting that June report,” he said.

The Fed’s favorite measure of inflation, the personal consumption expenditure index, may have already peaked, economists said. But it still climbed 6.3% in the year to May, more than three times the central bank’s 2% target. Many households are struggling to cope with the rising cost of housing, food and transportation.

Although there are encouraging signs that inflation may soon ease – inventories have been piling up at retailers, global commodity gas prices have fallen this week and consumer demand for some goods may start to slow – these indicators may not reassure central bankers at this stage .

The Fed has repeatedly been disappointed by false auroras. Officials had hoped that inflation had peaked last summer, only to see it pick up again in the fall. They have received regular predictions from Wall Street that it could hit its zenith, but these have yet to prove accurate.

And Fed officials are increasingly worried about having to prove their commitment to lower prices. If Americans come to believe that inflation will stay high year after year — if inflation expectations change, in Fed parlance — they might demand bigger wage increases to cover the anticipated costs. In turn, companies could get into the habit of continually charging more to cover larger payrolls, creating a cycle of rising prices.

This would make inflation even more difficult – and more painful – to eradicate.

Many officials at the June meeting of the Fed’s Policy Committee “felt that a significant risk the committee now faced was that high inflation could take hold if the public began to question the committee’s determination to adjust the policy direction as required,” according to the minutes released Wednesday.

This is part of the rationale for the Fed’s rapid rate path. Officials have signaled that they expect to push rates up to around 3.4% by the end of the year as they try to stifle price increases. They could achieve this by raising rates by 0.75 percentage points at their next meeting in July, 0.5 percentage points in September and 0.25 percentage points in November and December, for example.

“What you would like to do, if we can, is nip inflation in the bud before it takes root in the economy,” said Federal Reserve Bank of St. Louis, during a presentation in Zurich in June. 24.

It’s also the logic to take big steps sooner rather than later. Charles L. Evans, the president of the Federal Reserve Bank of Chicago, told reporters days earlier that a 0.75 percentage point move in July was “a very reasonable place to have a discussion” and would be likely. unless inflation starts to moderate.

The Fed will have new information by the time of its July meeting, but the central bank may prove less responsive than usual to incoming data in the current environment. Minor updates may not change much of a picture in which price increases have been piling up for months and officials believe expectations of rising inflation could spin out of control.

“The data they respond to has accumulated over the past year,” said JPMorgan’s Feroli. “It was realizing that over the past year they had missed the mark on inflation.”

nytimes

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