June 13, 2022, 4:00 p.m. ET
June 13, 2022, 4:00 pm ET The Federal Reserve Building in Washington. The central bank will release a new wave of economic projections on Wednesday. Credit … Pete Marovich for The New York Times
The Federal Reserve is likely to discuss the largest interest rate hike since 1994 when political leaders meet this week, as a number of new data suggest that inflation is advancing further and showing she was more stubborn than they expected.
The central bank is likely to consider raising interest rates by three-quarters of a percentage point on Wednesday, when it is willing to announce both its decision and a new set of economic projections.
The Fed raised interest rates by half a percentage point in May, and officials had suggested for months that a similar increase would be warranted at its June and July meetings if the data evolved as expected. But inflation figures have not come as expected. In contrast, a report from last week showed that inflation accelerated again in May and is at its fastest pace since 1981. Two separate measures from inflation expectations, one last week and one published on Monday , showed that consumers are beginning to predict a noticeably faster price. increases.
Surely this will increase the Fed’s sense of unease, which is trying to suppress high inflation before it changes behavior and becomes a more permanent feature of the economic backdrop. And the series of sad news has made both economists and investors bet that the central bank will start raising interest rates at a faster rate to indicate that it recognizes the problem and that it is making fighting inflation a priority. .
“They’ve made it pretty clear that they want to prioritize price stability,” said Pooja Sriram, a US economist at Barclays. “If this is their plan, a more aggressive political stance is what they should do.”
Wall Street is preparing for interest rates to rise more than investors had predicted a few days ago, a reality that is plunging stocks and causing other markets to bleed. Investors now expect rates to rise to a range of 2.5 to 2.75 percent from the September Fed meeting, suggesting that central banks should make a three-quarter point move during its next three meetings. The Fed has not made such a big move since the early 1990s, and that upper limit of 2.75 percent would be the highest rate federal funds have had since the 2008 global financial crisis.
When the Fed raises its policy interest rate, it filters through the economy to make loans of all kinds more expensive, including mortgage debt and corporate loans. This slows down the housing market, prevents consumers from spending as much, and cools corporate expansions, weakening the labor market and the economy as a whole. Slower demand may help reduce price pressures as fewer buyers compete for goods and services.
But interest rates are a powerful tool, so it’s hard to keep up with the economy. Similarly, it is difficult to predict how many conditions need to be cooled to reduce inflation convincingly. Pandemic-related supply problems could be alleviated, allowing for a slowdown. But the war in Ukraine and the recently re-imposed blockades on China aimed at containing the coronavirus could keep prices high.
That is why investors and households are increasingly afraid that the central bank will cause a recession. Consumer confidence is plummeting and a bond market signal that traders are following closely suggests a fall could come. The yield on the 2-year Treasury note, a benchmark for borrowing costs, rose slightly above the 10-year yield on Monday. This so-called reversed yield curve, when it costs more to borrow for shorter periods than longer periods, does not usually occur in a healthy economy and is often taken as a sign of an impending recession.
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