Federal Reserve Chairman Jerome Powell speaks at a news conference Wednesday, Sept. 21, 2022, at the Federal Reserve Board building, in Washington. Stepping up its fight against chronically high inflation, the Federal Reserve raised its key interest rate by a significant three-quarters of a point for the third time in a row, an aggressive pace that heightens the risk of an eventual recession. (AP Photo/Jacquelyn Martin) The Federal Reserve took its starkest assessment on Wednesday of what it will take to finally tame painfully high inflation: Slower growth, higher unemployment and possibly a recession. Speaking at a news conference, Chairman Jerome Powell acknowledged what many economists have been saying for months: that the Fed’s goal of creating a “soft landing” — in which it would succeed in slowing growth enough to contain inflation, but not enough to trigger a recession — looks increasingly unlikely. “The chances of a soft landing,” Powell said, “are likely to diminish” as the Fed steadily raises borrowing costs to slow the worst run of inflation in four decades. “No one knows whether this process will lead to a recession or, if so, how significant that recession would be.” Before Fed policymakers would consider halting rate hikes, he said, they would need to see continued slow growth, a “moderate” rise in unemployment and “clear evidence” that inflation is returning to their 2 percent target. “We have to put inflation behind us,” Powell said. “I wish there was a painless way to do this. There is no.” Powell’s remarks followed another major three-quarter rate hike – the third in a row – by the Fed’s policy-making committee. Its latest action brought the Fed’s key short-term rate, which affects many consumer and business loans, to 3% to 3.25%. This is the highest level since early 2008. Falling gas prices slightly dampened headline inflation, which was still a painful 8.3% in August from a year earlier. Those falling gas pump prices may have contributed to President Joe Biden’s recent surge in public approval ratings, which Democrats hope will boost their prospects in November’s midterm elections. On Wednesday, Fed officials also forecast more hikes in size, raising their benchmark interest rate to about 4.4% by the end of the year — a full point higher than they had envisioned as recently as June. And they expect to raise the rate again next year, to around 4.6%. That would be the highest level since 2007. By raising lending rates, the Fed makes it more expensive to get a mortgage or car or business loan. Consumers and businesses probably borrow and spend less, cooling the economy and slowing inflation. Other major central banks are also taking aggressive steps to combat global inflation, which has been fueled by the global economic recovery from the COVID-19 pandemic and then Russia’s war against Ukraine. On Thursday, Britain’s central bank raised its key interest rate by half a percentage point — to its highest level in 14 years. It was the Bank of England’s seventh consecutive move to raise borrowing costs at a time when rising food and energy prices have fueled a severe cost-of-living crisis. This month, Sweden’s central bank raised its key interest rate by a full point. And the European Central Bank achieved its biggest rate hike ever with a three-quarter increase for the 19 countries that use the euro. In their quarterly economic forecasts on Wednesday, Fed policymakers also predicted that economic growth would remain weak for years to come, with unemployment rising to 4.4 percent by the end of 2023, from the current level of 3 .7%. Historically, economists say, whenever unemployment has risen by half a point over several months, a recession has always followed. “So the (Fed’s) forecast is a tacit admission that a recession is likely unless something extraordinary happens,” said Roberto Perli, an economist at Piper Sandler, an investment bank. Fed officials now forecast the economy will grow just 0.2% this year, well below their forecast of 1.7% growth just three months ago. And they envision sluggish growth below 2% from 2023 to 2025. Even with the sharp rate hikes the Fed predicts, it still expects core inflation — which excludes volatile food and gas costs — to be 3.1% at the end of 2023, well above the 2% target. Powell warned in a speech last month that the Fed’s moves would “cause some pain” to households and businesses. He added that the central bank’s commitment to reduce inflation to its 2% target was “unconditional”. Short-term interest rates at the level the Fed now envisions will force many Americans to pay much higher interest rates on a variety of loans than in the recent past. Last week, the average fixed mortgage rate topped 6%, a 14-year high, which explains why home sales have fallen. Credit card interest rates have reached their highest level since 1996, according to Bankrate.com. Inflation now appears to be increasingly fueled by higher wages and a steady consumer desire to spend and less of the supply shortages that plagued the economy during the pandemic recession. On Sunday, Biden told CBS’ “60 Minutes” that he believed a soft landing for the economy was still possible, suggesting that his administration’s recent energy and health care legislation would lower prices for pharmaceuticals and healthcare. The law may help lower prescription drug prices, but outside analyzes suggest it won’t directly help reduce overall inflation. Last month, the nonpartisan Congressional Budget Office found that it would have a “negligible” effect on prices through 2023. The University of Pennsylvania’s Penn Wharton Budget Model went even further, saying that “the impact on inflation is statistically indistinguishable from zero » the next decade. Even so, some economists are beginning to worry that the Fed’s rapid rate hikes — the fastest since the early 1980s — will do more economic damage than is needed to tame inflation. Mike Konczal, an economist at the Roosevelt Institute, noted that the economy is already slowing and that wage increases – a key driver of inflation – are leveling off and by some measures even falling a bit. Surveys also show that Americans expect inflation to fall significantly over the next five years. This is an important trend because inflation expectations can become self-fulfilling: If people expect inflation to fall, some will feel less pressure to accelerate their purchases. Less spending would help contain price increases. The Fed’s rapid rate hikes mirror moves by other major central banks, adding to concerns about a potential global recession. The European Central Bank last week raised its benchmark interest rate by three-quarters of a percentage point. The Bank of England, the Reserve Bank of Australia and the Bank of Canada have all made sharp interest rate hikes in recent weeks. And in China, the world’s second-largest economy, growth is already suffering from the government’s repeated COVID lockdowns. If recession sweeps most major economies, it could derail the US economy as well.
