Federal Reserve Chair Jerome Powell on Wednesday underscored the Fed’s determination to raise interest rates high enough to slow inflation, a commitment that has fanned concerns that the central bank’s fight against surging prices could tip the economy into recession.
Financial markets shuddered Thursday as they adjusted to the Federal Reserve’s latest attempts to address inflation.
The Federal Reserve on Wednesday intensified its drive to tame high inflation by raising its key interest rate and signaling more large rate increases to come that could raise the risk of another recession.
A series of sizable increases would heighten borrowing costs for consumers and businesses, likely leading to an economic slowdown and raising the risk of a recession.
The prospect that the Fed will accelerate its credit tightening, further raising borrowing costs for households and businesses, drove the stock market sharply lower Monday. The broad S&P 500 index fell into bear-market territory.
The job growth in May was high enough to keep the Federal Reserve on track to pursue what’s likely to be the fastest series of rate hikes in more than 30 years.
The White House launched a push Tuesday to contain the political damage caused by inflation after President Joe Biden complained for weeks to aides that his administration was not doing enough to publicly explain the fastest price increases in roughly four decades.
Prices for just about everything Americans buy have spiked in the past two years. Inflation, which had been scarcely noticeable for decades, is suddenly the top concern most people have about the economy. And it all seemed to catch Washington, D.C., by surprise.
Federal Reserve officials agreed when they met earlier this month that they may have to raise interest rates to levels that would weaken the economy as part of their drive to curb inflation, which is near a four-decade high.
Although major swaths of the economy—including the job market and consumer spending—remain robust, there are mounting worries that rising borrowing costs for consumers and businesses, after years of near-zero interest rates, could cause a sudden retrenchment.
Chairman Jerome Powell on Tuesday underscored the Federal Reserve’s determination to keep raising interest rates until there is clear evidence inflation is steadily falling—a high-stakes effort that carries the risk of causing an eventual recession.
Federal Reserve Chair Jerome Powell, fresh off winning confirmation for a second term, acknowledged for the first time Thursday that high inflation and economic weakness overseas could thwart his efforts to avoid causing a recession.
The 80-19 vote reflected broad support in Congress for the Fed’s drive to combat surging prices through a series of sharp interest rate hikes that could extend well into next year. The Fed’s goal is to slow borrowing and spending enough to ease the inflation pressures.
The observations came in the Federal Reserve’s semiannual Financial Stability Report that looks at trends in trading and investing as well as broad economic issues.
Fed officials raised interest rates by a half-point last week and Chairman Jerome Powell signaled they would continue at that pace at meetings in June and July to curb inflation.
Economists and investors foresee the fastest pace of Federal Reserve rate increases since 1989. The result could be much higher borrowing costs for households well into the future.
The Federal Reserve intensified its fight against the worst inflation in 40 years by raising its benchmark short-term interest rate by a half-percentage point Wednesday—its most aggressive move since 2000—and signaling further large rate hikes to come.
The relatively close vote reflects the increasingly partisan atmosphere in Congress that is now engulfing the nomination process for the Fed, an independent institution that has sought to remain above politics.
As the Federal Reserve sees it, the surge in job postings forces employers to boost wages to attract and keep workers. Those higher labor costs are then passed to customers in the form of higher prices, thereby helping fuel inflation.
The Fed last month kicked off what’s expected to be a series of interest rate hikes to tame inflation, but the efforts to temper demand will take time to materialize.
