US Federal Reserve warns of ‘pain’ as inflation surges | federal reserve

Federal Reserve Chair Jerome Powell warned last month that “pain” was ahead as the Federal Reserve struggled to contain a 40-year surge in inflation. Powell will offer some clues as to how much pain he expects Wednesday.

The Fed is expected to announce another significant rate hike on Wednesday afternoon after the conclusion of its most recent meeting. It will also update its economic forecasts for the US economy.

Economists are predicting that the Fed will hike interest rates by 0.75 percentage point, the third such hike in a row, and signal plans for more rate hikes in the coming months.

The hike comes as central banks around the world are raising interest rates to deal with a mounting cost-of-living crisis. The Bank of England is expected to announce its biggest rate hike yet 25 years this week and the European Central Bank increased interest rates across the euro zone by a record margin earlier this month as inflation hit double digits in some of its 19 member countries.

For the past year, the Fed dismissed inflation as a “temporary” problem brought on by the pandemic and supply chain problems, but consumer prices remained stubbornly high and have remained so despite a changed stance from the Fed and its aggressive rate hikes.

The Bureau of Labor Statistics said last month prices were up 8.3% last month from August last year. The Fed’s target rate for inflation is 2% annually.

This message has ice some to speculate that the Fed could raise rates by a full percentage point, a drastic move for an institution that normally moves rates cautiously up and down a quarter of a percentage point.

The sharp increase in interest rates is intended to slow down the economy and depress prices. Higher interest rates have impacted the housing market, where rates on a 30-year mortgage have now passed 6% for the first time in 14 years.

But rate hikes take time to penetrate the broader economy and so far they have done little to stem inflation, nor have they impacted the labor market. Last month, 315,000 new jobs were added in the US and the unemployment rate remains near a 50-year low at 3.7%.

Until recently, Powell had suggested that a “soft landing” was possible for the economy, where rising interest rates would lower prices without causing a severe financial downturn.

But at the central bankers’ annual meeting in Jackson Hole, Wyoming, last month, Powell acknowledged that economic hardship is a price the Fed is willing to pay in order to control inflation. “While higher interest rates, slower growth and weaker labor market conditions will lower inflation, they will also cause some pain to households and businesses,” he said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

Ellen Zentner, Morgan Stanley’s chief US economist, said the Fed has yet to see the “pain” it believes is necessary to tame inflation.

“So far, higher interest rates have inflicted little widespread pain on the real economy, giving the Fed scope to move further into hawkish territory. Consider that a housing correction is underway so far, if you squint really hard you can see net job creation is slowing and we’ve seen some slowdown in consumer spending, but that’s not enough to show the ongoing “The bottom line is that the Fed needs more evidence that its actions are taking a bite out of the real economy.”

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