Typically, the Fed raises rates in quarter-point increments. But after having miscalculated in downplaying inflation last year as likely transitory, Powell has led the Fed to raise rates aggressively to try to slow borrowing and spending and ease price pressures.
Wednesday’s latest rate increase coincided with growing concerns that the Fed may tighten credit so much as to derail the economy. The government has reported that the economy grew last quarter, and employers are still hiring at a solid pace. But the housing market has cratered, and consumers are barely increasing their spending.
The average rate on a 30-year fixed mortgage, just 3.14 per cent a year ago, surpassed 7 per cent last week, mortgage buyer Freddie Mac reported. Sales of existing homes have dropped for eight straight months.
Blerina Uruci, an economist at T. Rowe Price, suggested that falling home sales are “the canary in the coal mine” that demonstrate that the Fed’s rate hikes are weakening a highly interest-rate sensitive sector like housing. Uruci noted, though, that the Fed’s hikes haven’t yet meaningfully slowed much of the rest of the economy, particularly the job market or consumer demand.
“So long as those two components remain strong,” she said, the Fed’s policymakers “cannot count on inflation coming down” close to their 2 per cent target within the next two years.
Several Fed officials have said recently that they have yet to see meaningful progress in their fight against rising costs. Inflation rose 8.2 per cent in September from 12 months earlier, just below the highest rate in 40 years.
Still, the policymakers may feel they can soon slow the pace of their rate hikes because some early signs suggest that inflation could start declining in 2023. Consumer spending, squeezed by high prices and costlier loans, is barely growing. Supply chain snarls are easing, which means fewer shortages of goods and parts. Wage growth is plateauing, which, if followed by declines, would reduce inflationary pressures.
Yet the job market remains consistently strong, which could make it harder for the Fed to cool the economy and curb inflation. This week, the government reported that companies posted more job openings in September than in August. There are now 1.9 available jobs for each unemployed worker, an unusually large supply.
A ratio that high means that employers will likely continue to raise pay to attract and keep workers. Those higher labour costs are often passed on to customers in the form of higher prices, thereby fuelling more inflation.
Ultimately, economists at Goldman Sachs expect the Fed’s policymakers to raise their key rate to nearly 5 per cent by March. That is above what the Fed itself had projected in its previous set of forecasts in September.
Outside the United States, many other major central banks are also rapidly raising rates to try to cool inflation levels that are even higher than in the US
Last week, the European Central Bank announced its second consecutive jumbo rate hike, increasing rates at the fastest pace in the euro currency’s history to try to curb inflation that soared to a record 10.7 per cent last month.
Likewise, the Bank of England is expected to raise rates Thursday to try to ease consumer prices, which have risen at their fastest pace in 40 years, to 10.1 per cent in September. Even as they raise rates to combat inflation, both Europe and the UK appear to be sliding toward recession.
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