The Federal Reserve will have to keep boosting its benchmark interest rate to a point that raises unemployment and gets inflation down from unusually high levels, two officials said in separate remarks Monday.
The Federal Reserve boosted its benchmark short-term rate, which affects many consumer and business loans, to a range of 3% to 3.25%, the highest level since early 2008.
Economists expect Fed officials to forecast that their key rate could go as high as 4% by the end of this year. They’re also likely to signal additional increases in 2023, perhaps to as high as roughly 4.5%.
The Federal Reserve’s hopes for a “soft landing” rest on a rarely occurring phenomenon: Unemployment will rise not because workers lose their jobs, but because more people without jobs start looking for work.
Federal Reserve leader Jerome Powell acknowledged the rate hikes will hurt the job market and U.S. households, but he also said the pain would be worse if inflation were allowed to fester.
The Fed is tightening credit even while the economy has begun to slow, thereby heightening the risk that its rate hikes will cause a recession later this year or next.
Such an increase would mark a further ramping up of the Fed’s rate hikes as it intensifies its fight against accelerating inflation. The Fed hasn’t raised its rate by 1 percentage point in several decades.
Investors upped bets the central bank could make a one percentage-point rate hike at its July 26-27 meeting—which would be the largest increase of the modern Federal Reserve era.
St. Louis Federal Reserve President James Bullard said he currently supports a 0.75 percentage point increase in the Fed’s benchmark short-term interest rate at its next meeting later this month.
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.
Mortgage applications are down more than 15% from last year and refinancings are down more than 70%, according to the Mortgage Bankers Association.
Economic history suggests that aggressive, growth-killing rate hikes could be necessary to finally control inflation. And typically, that is a prescription for a recession.
The result of the rate hikes is increasingly higher borrowing costs as the Fed fights the most painfully high inflation in four decades and ends a decades-long era of historically low rates.
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 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.
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.
ARMs made up 13% of all home loans by dollar volume in March, their highest share since January 2020, according to CoreLogic.
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.
