Federal Reserve warns of ‘pain’ ahead as inflation surges | 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 give an indication of how much pain he expects on Wednesday.

The Fed is expected to announce another sharp interest rate hike on Wednesday afternoon after the conclusion of its last meeting. It will also update its economic forecast for American economy.

Economists predict the Fed will raise its benchmark interest rate by 0.75 percentage points, the third consecutive such hike, and signal its intention to raise rates again in the coming months.

The rise comes as central banks around the world hike rates to tackle the cost of living crisis. The Bank of England is expected to announce its largest rate hike in 25 years this week and the European Central Bank rising interest rates in the eurozone by a record margin earlier this month as inflation hit double digits in some of its 19 member countries.

The Fed last year dismissed inflation as a “transitional” problem triggered by the pandemic and supply chain issues, but consumer prices have stayed stubbornly high and remained so despite a shift in Fed sentiment and aggressive rate hikes.

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

This news led some to speculate that the Fed could raise rates by a full percentage point, a drastic move for an institution that typically raises and lowers rates cautiously by a quarter of a percentage point.

The sharp rise in interest rates is aimed at slowing the economy and lowering prices. Rising rates have spilled over into the housing market, where rates on a 30-year mortgage have now topped the 6% mark for the first time in 14 years.

But rate hikes take time to trickle down to the wider economy and so far have done little to curb inflation, nor have they had any impact on the labor market. Last month, the United States created 315,000 new jobs and the unemployment rate, at 3.7%, remains near its lowest level in 50 years.

Until recently, Powell had suggested that a “soft landing” was possible for the economy, in which a rate hike would lower prices without causing a severe financial downturn.

But at the annual meeting of central bankers in Jackson Hole, Wyoming, last month, Powell acknowledged that economic distress was a price the Fed was willing to pay to control inflation. “While higher interest rates, slower growth and looser labor market conditions will reduce inflation, they will also hurt households and businesses,” he said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

Ellen Zentner, chief U.S. economist at Morgan Stanley, said the Fed has yet to see the “pain” it feels is necessary to get inflation under control.

“So far, the rate hike has inflicted little broad-based pain on the real economy, so the Fed has room to continue advancing into restrictive territory. Consider that so far, a housing correction is ongoing, if you squint really hard you can see net job gains slowing, and we’ve seen some deceleration in consumer spending, but that’s not enough to produce sustained growth below the potential the chair is looking for “Zentner wrote in a note to investors. “Ultimately, the Fed needs more evidence that its actions are undermining the real economy.”

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