The Federal Reserve has been signaling that it will lighten off on its fight against inflation by leaving its benchmark interest rate steady for the second time in three meetings on Wednesday. Officials from the Federal Reserve have indicated that they plan to hike interest rates one more before the end of 2022 in an effort to curb inflation.
After 11 rate hikes since March, the Federal Reserve has decided to leave its benchmark rate at roughly 5.4% in an effort to stem the worst inflation the United States has seen in 40 years. While consumer price inflation has fallen from its June high of 9.1% to its current level of 3.7%, it is still much above than the Federal Reserve’s 2% target.
Fed Chair Jerome Powell said at a press conference following the most recent policy meeting that despite the recent slowdown in inflation, the central bank is not yet prepared to declare success. He reaffirmed the Fed’s resolve to employ all available measures to reduce inflation to the 2% target.
In other words, “we still have some ways to go,” as Powell put it. And we’re going to keep working on it until it’s finished.
The Federal Reserve is fine-tuning its rate policy in an effort to steer the economy toward a “soft landing,” in which inflation declines but no recession is triggered. The central bank faces a delicate balancing act as it tries to reduce demand in order to decrease inflation without triggering widespread job losses or an economic downturn.
In contrast to the four rate cuts forecast in June, the Fed now expects to reduce rates only twice in 2023. Since they are still worried about inflationary pressures, this indicates that they plan to keep rates high for a long time.
The Fed’s benchmark rate is expected to remain at roughly 5.1% through the end of 2024, according to these predictions, which is significantly higher than it was before the pandemic. Based on their forecasts, central bankers appear willing to keep rates high for a longer period of time in order to bring inflation down to below 2%.
As for how high rates will need to go and for how long they would need to stay elevated, Powell admitted there is still uncertainty. He assured the public that the Fed would carefully consider economic developments and change policy accordingly.
“Restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy,” said Powell. The agony would be much worse if price stability couldn’t be restored, though.
In spite of the fact that the Fed’s actions to far have dramatically increased borrowing costs for individuals and businesses, the economy and the job market have proven robust, belying fears that the abrupt rate hikes would cause mass layoffs and a devastating downturn.
The Fed has recently revised upwards its expectations for economic growth in both this year and next. The June estimate of 1% for GDP growth in 2022 has been revised upward to 2.1% for the current year. They now anticipate 1.5% growth for next year, up from an earlier prediction of 1.1%.
In spite of tighter monetary policy meant to dampen demand and limit inflation, the improved prognosis suggests the economy remains expanding at a moderate but steady speed.
Household spending in the United States has been buoyed by continued solid job growth and moderate salary raises. Still, increased interest rates could affect economic activity more noticeably in the long run.
Mortgages, auto loans, and other forms of borrowing have all seen price increases as a result of the Federal Reserve’s rapid rate hikes this year. Smaller future rate increases will add to those costs over time, but they will still be significant.
Powell acknowledged in his news conference that the Fed is aware of delays between policy changes and their effects on the economy. However, he stressed that the central bank must not ease up on its fight against inflation too soon.
“We have to stick to this,” Powell emphasized. Inflation is a problem that must be solved. I really hope there’s a simple solution for this. Absolutely not!
The good news is that core inflation (inflation excluding the highly erratic costs of food and energy) has been decreasing over the past few months. Predictions have it at 3.7% by the end of 2022 and then show a downward trend thereafter.
That’s better news than the Fed’s June prediction that core inflation would fall only to 3.9% by year’s end. If the Fed sees actual inflation data moving in the direction it wants, it will have some wiggle room to reduce the magnitude and frequency of future rate hikes.
There are still dangers that might revive inflation or threaten the economy. Gas prices in the United States have increased gradually over the previous month as oil prices have risen by more than 12%. Inflationary pressures would increase if gas prices stayed high for an extended period of time.
The job market may have cooled down, but it’s still at record highs. If hiring remains robust despite sluggish economic development, companies may resort to offering greater wages in an effort to attract and keep people, further pushing up costs.
In addition to these dangers, the Fed’s fight against inflation is taking place against the backdrop of other major central banks hiking rates to combat inflation. The effects of a globally coordinated tightening on economies and investments may be magnified.
Particularly, the European Central Bank raised its main rate to a record high of 4% last week in an effort to combat skyrocketing inflation brought on by Russia’s invasion of Ukraine. The Bank of England’s upcoming policy meeting shows that it, too, is likely to maintain its rate hike trajectory.
However, Powell reassured the public that the Fed’s vigorous policy tightening is not intended to deliberately push the United States into recession.
“We don’t seek to put people out of work,” he said. As one staff member put it, “We never think there are too many people working and not enough people unemployed.”
Instead, Powell stated that the Fed’s objective is to restore equilibrium between supply and demand in order to reduce inflation to more manageable levels while keeping the labor market robust.
The head of the Fed has stated that moving forward, officials will be keeping a close eye on inflation data and adjusting their response accordingly. More rate increases are necessary, he said again, though he was vague about the size and timing of any such increases.
Powell emphasized that the Fed will continue to make decisions on an as-needed basis, with each meeting taking into account the most recent economic data and projections. The Fed will stop raising rates, he said, whenever it judges that they are high enough to restrain growth and inflation.
“At some point, as we continue to raise rates, policy will become sufficiently restrictive and we will turn the corner,” Powell said. As a result, “we will then be in a position to hold policy at a restrictive level for some time to achieve our 2% inflation goal.”