The Federal Reserve revealed another big rate hike as signs of an economic slowdown grow

US Federal Reserve Chairman Jerome Powell takes questions during a press conference following a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, US, June 15, 2022. REUTERS/Elizabeth Frantz/File Photo

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WASHINGTON (Reuters) – With the Federal Reserve expected to raise its key interest rate by three-quarters of a percentage point on Wednesday to fight rising inflation, the focus will turn to how deep the signs of an economic slowdown are for policymakers. .

The expected increase in the federal funds rate, which is the Fed’s main tool in trying to lower inflation from its highest level in four decades, will lift the US central bank to a slope of sorts as it reaches a level of about 2.4% which is estimated . To stop encouraging economic activity.

It would represent one of the fastest changes ever in US monetary policy — just over four months ago the policy rate was near zero and the Federal Reserve was buying billions of dollars in bonds every month to help the economy recover from the COVID-19 pandemic.

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But while little progress has been made so far in combating inflation, signs of economic stress are piling up — and raising the stakes for Fed officials as they weigh how tight monetary policy needs to be to slow price increases against the risks that might also occur. It can lead to stagnation. Read more

Even before this week’s two-day policy meeting, the inflation problem was deemed so serious that investors placed a one in four chance that the Fed would surprise markets with a one percentage point larger increase in the benchmark interest rate overnight, reminiscent of the hikes it used In the early 1980s then-Fed Chairman Paul Volcker.

As the Fed’s impact on the economy becomes more apparent, the issue now is whether it is in danger of being overstated.

Parts of the US bond market are signaling an increased potential for a recession, with two-year US Treasury yields now higher than in 10-year Treasuries, a possible sign of a loss of confidence in near-term economic growth and reflecting the possibility of a recession. The Fed may have to cut interest rates within a relatively short period of time.

Fears of a shutdown in the economy were stored up late Monday when Walmart, whose massive footprint provides a broad view of consumer behavior, cut its earnings forecast and said inflation pressured shoppers to spend their money on food and fuel rather than discretionary higher-margin items like electronics and clothing. . For its part, General Motors said it had eased hiring and postponed planned spending in response to inflation and to hedge against a potential broader slowdown. Read more

The US Commerce Department is expected to report on Thursday that gross domestic product grew at a strong pace in the second quarter. New employment data due next week will show whether strong job creation, which is an important force for the US economy at the moment, continued into July.

conflicting data

Fed policymakers will not release their own new economic forecasts on Wednesday. But the new policy statement due out at 2 PM ET (1800 GMT) and Fed Chairman Jerome Powell’s press conference half an hour later should detail how the central bank views recent economic data and at least hint at its next steps.

That will almost certainly include another interest rate hike at the Fed’s next policy meeting in September, and upcoming inflation data is likely to determine whether officials opt for another 75 basis point hike, or back down to a half-percentage point move.

With consumer prices rising at an annual rate of more than 9% as of June, Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote recently: “The Fed won’t slow down the pace of increases until they are satisfied that inflation has shifted.”

A number of Federal Reserve officials have said at various points since the beginning of the year that they believe inflation has peaked, but are alert because prices have continued to rise even faster. By the Fed’s preferred metric, inflation is more than triple the central bank’s annual target of 2%, leaving policymakers behind with not only unusually large increases of 75 basis points – the biggest moves since 1994 – but a promise to keep raising borrowing costs until they come down. Monthly inflation figures.

For some economists the risk of error has increased, as price data could lag the impact of higher interest rates on the economy and prompt the Federal Reserve to continue tightening its monetary policy in the midst of a slowdown.

The average contract rate on a 30-year fixed-rate mortgage has risen from less than 3% to about 5.5% based on Fed rate increases so far, for example, and new home sales have fallen to their lowest levels since the start of the pandemic.

By the time of the Fed. At the 20-21 meeting, policy makers will have additional data for two months on prices, consumer spending, business output, jobs and other aspects of the economy.

If inflation slows before that meeting, it could clear the way for the Fed to slow down.

Investors are, for now, roughly divided on whether that will happen, with the data likely to continue to drag in both directions.

The US economy may have contracted in the first half of the year, but job growth remains solid. Inflation is driving a record drop in consumer sentiment, but consumers are still spending, and so are businesses, Greg Dako, chief economist at EY-Parthenon, wrote this week. The United States is now a “world of contradictions”.

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(Howard Schneider reports). Edited by Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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