by Christopher Ragber
WASHINGTON ( Associated Press) – The Federal Reserve is expected to announce its biggest interest rate hike since 1994 on Wednesday afternoon – a bigger increase than before and a sign that central banks are stubbornly trying to control high inflation. is struggling.
The central bank is believed to raise its benchmark short-term rate by up to three-quarters of a percentage point, far higher than the typical quarter-point increase, in the range of 1.5% to 1.75%. It will also predict additional large rate hikes by the end of the year.
A series of large increases will drive up the cost of borrowing for consumers and businesses, increasing the likelihood of an economic downturn and increasing the risk of a recession. The Fed’s previous rate hike has already had the effect of raising mortgage rates by about 2 percentage points since the start of the year and slowing home sales.
Other central banks around the world are also acting swiftly to try to cushion rising inflation, even with their countries at greater risk of recession than the US in July from the European Central Bank. Rates are expected to rise by a quarter-digit, its first increase in 11 years. If inflation remains at record-high levels, it could announce a major hike in September. On Wednesday, the ECB vowed to create a market backstop that could buffer member countries against the financial turmoil that erupted during the debt crisis more than a decade ago.
Global efforts to strengthen credit are increasing the risk of a severe recession in the United States, Europe and elsewhere. Last week, the World Bank warned of the threat of “inflation” – slow growth coupled with high inflation around the world.
By the end of 2022, the Fed will have raised its key rate to a range of 3.25% to 3.5%, some economists predict, higher than forecast a few weeks ago. At that level, the rate would be well above “neutral,” meaning at a level that would aim to slow growth. In March, the Fed projected it would raise rates by just 1.75% to 2% by the end of the year.
Expectations of big Fed hikes have sent a range of interest rates to their highest points in years. The yield on the benchmark 2-year Treasury note for corporate bonds has jumped to 3.3%, its highest level since 2007. The 10-year Treasury yield, which affects mortgage rates, has climbed to 3.4%, nearly half a point since last week and the highest level since 2011.
The Fed received some mixed news Wednesday morning, when the government reported that retail sales fell 0.3% in May, the first such drop since December, and a sign that higher gas prices may drive consumers less on other purchases. may be forced to spend. A continued decline in spending can slow the economy but also ease inflationary pressures over time.
After the Fed’s last meeting in May, when it raised its benchmark rate by half a point, Chair Jerome Powell said similar increases for the central bank’s June and July meetings were “on the table, in line with whether the economy” Must develop “expectations.”
But on Friday, the government reported that year-on-year inflation unexpectedly rose to 8.6% in May, the highest such level in four decades. Inflation has spread to almost every corner of the economy, with rising costs of rent, gas, clothing, medical care and airline fares.
Also on Friday, a consumer sentiment survey by the University of Michigan found that Americans’ expectations for future inflation are rising. This is a worrying sign for the Fed, because expectations can be self-fulfilling: if people expect higher inflation in the future, they often change their behavior in ways that increase prices. For example, they can accelerate large purchases before they become more expensive. Doing so could spur demand and lead to a further increase in inflation.
The quick series of rate hikes now expected from the Fed will increase the chances of a recession in the next year or so.
“I think we’re kind of past the point where a ‘soft landing’ is plausible,” said Anita Markowska, chief economist at investment bank Jefferies, of the Fed’s efforts to raise rates enough to slow growth, but Not so much as to cause a recession. “I think they have to cause contractions.”
A key reason for the prospect of a recession is that economists increasingly believe that for the Fed to slow inflation to its 2% target, consumer spending, wage gains and economic growth will need to be sharply reduced. Ultimately, the unemployment rate will almost certainly have to rise — something the Fed hasn’t forecast yet, but in updated economic projections it will release Wednesday.
“When you’re going 90 mph on the highway and you miss your exit, slowing down isn’t going to help you,” Markowska said. “You have to take a U-turn and go back.”
Other central banks are also considering hike in jumbo rate to tackle inflation. In addition to the ECB, the Bank of England has raised rates four times to a 13-year high since December, despite predictions that economic growth would remain unchanged in the second quarter. BoE will hold interest rate meeting on Thursday.
The 19 EU countries that use the euro currency endured a record inflation of 8.1% last month. The United Kingdom hit a 40-year high of 9% in April. Although debt servicing costs are contained for now, rising borrowing costs for indebted governments have threatened to break the eurozone in the early part of the last decade.
The exception to the major central banks is Japan, whose central bank has kept its rates super-low amid inflation that is weaker than that of the US and Europe. This is causing the value of the yen to fall as investors move money to countries with high interest rates.