US Federal Reserve officials opened their two-day monetary policy meeting on Tuesday with another steep rate hike, which is viewed as near certain given stubbornly high inflation.
American families have felt the squeeze of soaring prices, which have risen so rapidly since the early 1980s, and Federal Reserve Chair Jerome Powell has made it clear officials will continue to act aggressively to cool the economy.
Many economists are expecting a third straight three-quarter-point rate hike when Wednesday’s session closes, an unprecedented action.
Fed officials were unanimous in the message that the Federal Reserve cannot risk allowing inflation to rise due to the damaging impact it will have on workers and businesses, but analysts warn the risks of a recession are mounting.
“The inflation rate will continue to set the tone for monetary policy in 2023, despite rising recession risks,” said Kathy Bostjancic of Oxford Economics, which forecasts a slowdown early next year.
“We see prolonged higher inflation, more aggressive Fed policy tightening and negative spillovers from a weakening global environment that will push the US economy into a mild recession in the first half of 2023.”
The Fed’s Open Market Committee (FOMC), which sets policy, is expected to announce its decision at 16:00 GMT on Wednesday.
Markets have been roiled by the firm’s hawkish statements from central bankers in recent days, and Powell’s post-meeting press conference will be closely scrutinized for information on what he thinks the next steps will be.
– More hikes coming? –
Despite the welcome drop in petrol prices at the pump in recent weeks, the disappointing August CPI report released last week showed that the cost of housing, food and medical services continued to rise. And when volatile food and energy prices are factored out, so-called core inflation accelerates.
It’s not just the current high level of inflation that worries policymakers, but fear that consumers and businesses are beginning to expect rising prices is becoming an enduring feature that could trigger a dangerous spiral and phenomenon called stagflation.
This fear has prompted the Fed to frontload its rate hikes rather than follow the more usual trajectory of small, incremental steps over a longer period of time.
The US Federal Reserve has hiked the benchmark interest rate four times this year, including two consecutive three-quarter-point hikes in June and July.
The aim is to increase borrowing costs and curb demand – and it is having an effect: for the first time since 2008, home mortgage rates have exceeded six percent.
And recent statements from Fed officials suggest that more rate hikes are imminent and no cuts will be made until inflation is controlled – daunting the hopes that markets had been building after the July monetary policy meeting.
The FOMC will also release members’ quarterly forecasts, showing how they feel about the direction of the economy, the impact of policy action, and how quickly inflation will fall.
