The Fed raised its key interest rate by 0.75 percentage points, the third such big rate hike in a row, bringing the Fed rate to 3%-3.25% and raising the cost of everything from credit card debt to mortgages up to the financing of companies. The central bank has signaled more hikes, forecasting that interest rates will reach 4.4% by the end of the year and won’t begin to decline until 2024. The Fed expects rate hikes to hit the labor market – raising the unemployment from 3.7% to 4.4% next year – house prices and slowing economic growth. “We have to put inflation behind us. I wish there was a painless way to do this. There isn’t,” Fed Chairman Jerome Powell said. “We have always understood that restoring price stability by achieving a relatively modest increase in unemployment and a soft landing would be very challenging. And we don’t know. No one knows whether this process will lead to a recession or, if so, how significant that recession would be.” Central bankers around the world are raising interest rates sharply as they too try to deal with the cost of living crisis. This week the Bank of England is expected to announce its biggest rate hike in 25 years. The European Central Bank raised interest rates across the eurozone by a record margin earlier this month. The Fed initially dismissed rising inflation, arguing it was a “transitional” phase caused by the pandemic and supply chain issues. But as prices escalated, the Fed announced a series of aggressive moves in hopes of bringing prices back under control. Until recently Powell had said he hoped the economy could achieve what he called a “soft landing” – a slowdown that would reduce costs but not lead to a spike in unemployment and a recession. Speaking at a congressional hearing on Wednesday, some of the top US bankers said it was too early to tell how rate hikes would affect the economy. “I think there is a possibility, not a big change, a small possibility, a soft landing,” said Jamie Dimon, chief executive of JPMorgan Chase. “There is a possibility of a mild recession, a possibility of a hard recession. And with the war in Ukraine and uncertainty in global energy and food supplies, there’s a chance it could be worse. I think policymakers need to be prepared for the worst, so we take the right actions if and when that happens,” he said. Rising interest rates make borrowing more expensive, which will reduce spending and prices. But policy is a blunt instrument, and rate hikes take time to trickle down to the broader economy. So far the Fed’s rate hikes have not had a significant impact. The US labor market remains strong, with unemployment still near a 50-year low, consumer spending increased last month and inflation remained stubbornly high in August, 8.3% higher than a year ago. There are, however, some signs of slowing down. Existing home sales fell in August for a seventh straight month, according to the National Association of Realtors. Sales were 19.9% lower than in August 2021 and are now at their lowest level since they stopped briefly during the height of the pandemic in 2020. And major employers, including BestBuy, Ford and Walmart, have announced layoffs or hiring freeze.
