WASHINGTON: US central bankers opened their two-day policy meeting on Tuesday with the prospect of another steep interest rate hike amid stubbornly high inflation.
American households have felt the pressure of rising prices at their fastest rate since the early 1980s, and Federal Reserve Chair Jerome Powell has made it clear that officials will act aggressively to cool the economy.
Most economists were expecting a third straight three-quarter point hike when the meeting ends on Wednesday, an unprecedented move.
Fed officials have been united in their message that the US central bank will not let inflation take hold because of the damaging impact on workers and businesses, but analysts warn that the risks of a recession are rising.
“Even as risks of a recession increase in 2023, the rate of inflation will continue to dictate the path of monetary policy,” said Cathy Bostjancic of Oxford Economics, who predicts a recession early next year.
“We see prolonged inflation, more aggressive Fed monetary tightening and negative spillover effects from a weakening global backdrop pushing the US economy into a mild recession in H1 2023.”
The Fed’s policy-setting Federal Open Market Committee (FOMC) will announce its decision at 1600 GMT on Wednesday.
A steep Fed rate hike seems certain after ugly inflation data
Markets have been hammered in recent days by decidedly hawkish statements from central bankers, and Powell’s press conference after the meeting will be closely watched for information on what the next steps will be.
More hikes to come?
Despite a welcome drop in gasoline prices at the pump in recent weeks, a disappointing consumer price report for August released last week showed that housing, food and medical costs continued to rise. And when volatile food and energy prices are removed, so-called core inflation accelerates.
Not only is the current hyperinflation of concern to policymakers, but the fear that consumers and businesses will begin to expect rising prices will become a permanent feature, forming a dangerous spiral and the phenomenon of stagflation.
That fear has led the Fed to front-load its rate hikes, rather than following small, gradual steps over a long period of time.
The US central bank has raised the benchmark lending rate four times this year, including two three-quarter point hikes in June and July respectively.
The goal is to raise the cost of borrowing and cool demand — and it’s having an effect: Home mortgage rates have now reached six percent for the first time since 2008.
And recent announcements from Fed officials suggest more rate hikes and no cuts until inflation is under control — dampening hopes in markets following the July policy meeting.
The FOMC also releases quarterly estimates from members that show how they feel about the direction of the economy and the impact of policy moves and how quickly inflation will slow.