Fed set for another big rate hike with economy on knife’s edge

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US central bankers face an increasingly difficult balancing act as they struggle to douse scorching inflation while still keeping the economy growing, though they have made it clear they are willing to risk a recession.

But with war still raging in Ukraine, and Covid-19 causing ongoing issues in Asia, avoiding an economic downturn will require luck and depend on many factors outside the Federal Reserve’s control.

The Fed holds its two-day policy meeting next week, where it is expected to hike the benchmark borrowing rate on Wednesday by another three-quarters of a percentage point in its aggressive campaign to cool demand and ease price pressures.

Slowing the economy is likely to cause more job losses, but policymakers want to avoid at all costs the greater pain of a price spiral that becomes entrenched or spins out of control.

– Aggressive rate hikes –

“It’s a very complicated, multi-dimensional issue,” Kohn told AFP, especially due to the ongoing supply chain uncertainty.

But they were caught flat-footed by the rapid run-up in prices, as Americans flush with cash due to massive government aid went on a spending spree, buying up cars, houses and other goods at a time when the global supply chain was still bogged down by pandemic lockdowns that continue in China.

Higher lending costs make it more expensive to borrow funds to buy cars and homes or expand businesses, which should cool demand, while also making it more attractive to save rather than spend.

Fed Chair Jerome Powell last month said the policy-setting Federal Open Market Committee would consider either a 50 or 75 bps hike at the July meeting, and most economists expect a repeat of the June three-quarter-point increase.

The equivalent amount of tightening in a single move hasn’t been seen since the early 1980s, when then-Fed chief Paul Volcker was on a crusade to crush a wage-price inflationary spiral.

But even Waller noted that it is important not to move too fast, and a full point hike would only be called for if data continue to show accelerating price increases.

But some recent data “indicate that previous rate increases have very likely started to work,” she said in an interview.

But there are signs of cracks, including falling home sales, a dramatic drop in mortgage applications and an increasing share of spending going to necessities.

Kohn said it will be important for Powell to communicate clearly about what data the Fed is looking for to slow or pause the rate hike cycle.

“But, boy, the amount of uncertainty around it is just huge.”

Originally published as Fed set for another big rate hike with economy on knife’s edge


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