The Fed will likely continue to raise rates for some time


In this file photo taken July 27, 2022, Federal Reserve Board Chairman Jerome Powell speaks during a press conference in Washington, DC. [Photo/Agencies]

The US Federal Reserve is in a tough spot, trying to contain stubbornly high inflation, but also looking to avoid an economic downturn.

The central bank is expected to raise its target rate for the fifth time this year on Wednesday, the second day of the Federal Open Market Committee (FOMC) policy meeting.

Commercial banks borrow and lend their excess reserves to each other overnight at this target rate, the federal funds rate.

The Fed has also been criticized for keeping rates too low for too long and then suddenly raising them, starting with the first of four increases in March this year, when the Fed’s key rate was around zero. It now stands at 2.25-2.50%, after two increases of 75 basis points (three quarters of a point) in June and July.

Another 75 basis point hike is expected on Wednesday, although some observers believe it could reach 100 basis points.

“As has often happened in the past, the Fed started too late with too little. The Fed did not stop buying bonds until March of this year, which means it continued to inject large amounts of cash into the economy until such time as inflation has taken off,” said Raymond Hill, a senior lecturer at Emory University’s Goizueta Business School in Atlanta, in comments to the China Daily.

He said he doesn’t expect the Fed to raise more than 75 basis points on Wednesday, but sees two more similar hikes in November and December.

“The only reason to do less (than 75 basis points on Wednesday) is last week’s buzz about stronger expectations of a recession which appears to have led to the sharp drop in the stock market,” Hill said. “However, all the data seems to be pointing in the opposite direction. August job growth was robust (315,000), unemployment up slightly but still weak (3.7%), labor force participation up slightly (62.4 from 62.1).”

The strength of the labor market and the growth of wages put upward pressure on consumer prices.

“I suspect that some FOMC members will be alarmed by [last week’s settlement] with the railway unions and the 24% wage increase they will receive over the period 2020-2024. Once inflation expectations are factored into future wage growth, the Fed’s job of containing inflation will become even more difficult,” Hill said.

He said “Fed actions must offset the continued fiscal irresponsibility of the President and Congress. State and local governments continue to spend COVID relief funds. Canceling student debt will be inflationary. And, while most people say the Inflation Reduction Act will have little effect on inflation, I’m cynical enough to expect it will actually increase inflationary pressure.”

The $737 billion inflation legislation – which includes nearly $400 billion for environmental programs, includes tax credits of up to $7,000 to purchase electric vehicles.

The Labor Department’s Consumer Price Index (CPI) report showed a year-over-year increase of more than 8% for six consecutive months. More recently, it rose 8.3% in August, 8.5% in July and 9.1% in June, the biggest increase since 1981.

“And the really big data shows that inflation isn’t going down,” Hill said. He noted that although gasoline and other fuel prices fell, “inflation in almost all other components of the CPI was unacceptably high, and core inflation (on which the Fed relies for its estimate of trend inflation) rose in August and stands at over 7% on an annual basis.”

The Fed’s target inflation rate is 2%. The bank’s dual mandate is price stability and maximum employment. The unemployment rate of 3.7% in August was up slightly from 3.5% in July, but remains low.

Maximum employment is loosely defined as the highest level of employment the economy can sustain without triggering inflation, which has not been achieved.

“In macro terms, the Fed’s story has remained largely unchanged: Inflation will return to target without the unemployment rate rising above 4.5%. They may well be right on that point,” he said. Narayana Kocherlakota, Professor Lionel W. McKenzie. in economics at the University of Rochester, told China Daily.

“But, as usual, the problem is in the pile: if they are wrong and they have to reduce inflation by slowing down the economy, then the unemployment rate may have to increase considerably, until 7% or even beyond,” he said.

Federal Reserve Chairman Jerome Powell, speaking at an event hosted by the Cato Institute on Sept. 8, believes the bank can fulfill both mandates.

“I don’t see the two goals as being in conflict at all because without price stability we won’t be able to achieve the kind of strong labor market we want for an extended period of time that benefits everyone. so I don’t see a case for moving to a single term,” he said.

Some financial experts say a 100 basis point Fed hike is possible.

Economists at Nomura on Sept. 13 changed their rate forecast by 75 to 100 basis points, writing that “a more aggressive path of higher interest rates will be needed to combat increasingly entrenched inflation.”

Nisha Patel, director and portfolio manager of fixed income at Parametric, told “Don’t be surprised if the Fed’s hand is forced up 100 basis points. The idea that inflation had peaked has dissipated, and now the likelihood of this soft landing in the economy has only diminished.”

Steven Englander, head of Group of 10 currency research at Standard Charter, told “If you’re on the FOMC and you think the market needs a shock and a fear to lower inflation expectations, so maybe you’re arguing for 100 basis points I think it makes more sense for the FOMC to say ‘we can keep raising rates as far as we have to, but we we don’t have to do it right away.

If the Fed’s rate hikes lead to a recession, which the economy is already in by a traditional measure (two consecutive quarters of GDP decline), a slowdown will have an impact globally.

In a report published in September by the World Bank, economist Stephen Roach wrote: “Despite the pitfalls of predicting anything these days, my cracked and worn crystal ball sees a global recession occurring in the year next. … Collectively, Europe, the United States, and China account for about half of the world’s GDP on a purchasing power parity basis, with no other economy able to fill the void, I fear that a global recession does indeed seem inevitable.


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