October 2, 2022

Brighton Journal

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Fed warns of future ‘pain’ as inflation rises | Federal Reserve

Federal Reserve Chairman Jerome Powell warned last month that there will be “pain” ahead as the US central bank struggles to contain a spike in inflation not seen in 40 years. Powell will provide some indication of how much pain to expect on Wednesday.

The Federal Reserve is expected to announce another sharp rate hike on Wednesday afternoon after wrapping up its last meeting. It will also update its economic forecasts for the Middle East US economy.

Economists expect the Fed to raise the benchmark interest rate by 0.75 percentage points, the third such hike in a row, and point to plans to raise rates again in the coming months.

The increase comes as central banks around the world are raising interest rates to tackle the rising cost of living crisis. The Bank of England is expected to announce the largest interest rate increase in 25 years This week the European Central Bank raise interest rates It crossed the eurozone by a record margin earlier this month as inflation hit double digits in some of its 19 member states.

Last year, the Fed dismissed inflation as a “transitional” issue raised by the pandemic and supply chain issues, but consumer prices remained stubbornly high And it remained so despite the change in the Fed’s viewpoint and the surge in interest rates.

The Bureau of Labor Statistics announced last week that prices rose last month by 8.3% compared to August last year. The Fed’s inflation target is 2% per year.

This news drove Some to speculate That the Fed could raise rates by a full percentage point, a drastic move for an institution that usually cautiously moves rates up and down by a quarter of a percentage point.

The sharp rise in interest rates aims to slow the economy and lower prices. High rates have fueled the housing market, with 30-year mortgage rates exceeding the 6% mark for the first time in 14 years.

But interest rate increases take time to translate into the broader economy, and so far they have done little to curb inflation, nor have they affected the labor market. The US added 315.000 new jobs last month, and the unemployment rate, at 3.7%, is still close to a 50-year low.

Until recently, Powell had suggested that a “soft landing” is possible for the economy, in which higher prices cause prices to fall without causing severe fiscal contraction.

But at the annual meeting of central bankers in Jackson Hole, Wyoming, Powell acknowledged last month that economic distress was a price the Fed was willing to pay to control inflation. “While high interest rates, slow growth, and weak labor market conditions will lower inflation, they will also bring some pain to households and businesses,” he said. These are the unfortunate costs of lowering inflation. But a failure to restore price stability would mean much greater pain.”

Elaine Zentner, chief US economist at Morgan Stanley, said the Fed has not yet seen the “pain” it believes is needed to tame inflation.

“So far, higher rates have inflicted quite a bit of pain on a large scale in the real economy, so the Fed has room to continue climbing into restricted territory. Keep in mind that so far, the housing correction is underway, if you stare really hard you can see a slowdown in gains. net jobs, and we’ve seen some slowdown in consumer spending, but that’s not enough to produce sustainable growth that’s below the potential the president is looking for,” Zentner wrote in a note to investors. “The bottom line is that the Fed needs more evidence that its actions are hurting the real economy.”

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