Rates this year could reach their highest levels since before the 2008 Wall Street crash if prices continue to rise. This outlook has slid stocks this year and pushed mortgage rates above 5 percent for the first time in a decade. Investors are nervously waiting to know how aggressively Fed Chairman Jerome Powell expects to increase financial costs for the remainder of 2022, a move that increases the likelihood of the US falling into recession during election year.
“I have no doubt that the Fed will hit its inflation target in the next two to three years,” said Gus Faucher, chief economist at PNC Financial, the nation’s ninth largest bank. “We may not like the result.”
The Fed’s rate hike campaign marks a new epoch for the economy. The central bank’s easy money policies have enriched many Americans by helping to send stock prices into the stratosphere, raising home valuations to a level record 43 trillion dollarsand given ordinary consumers extra cash to spend through lower borrowing costs and home refinancing.
The end of those good times has already shaken consumer confidence and soured the public about the Biden administration’s handling of the economy, putting unelected Fed politicians in the uncomfortable spotlight ahead of the Congressional midterm as they switch to mode. to fight inflation. Republican critics of the Fed – and some prominent Democrats – have even blamed the central bank itself for allowing inflation to go unchecked for so long.
“The Fed just doesn’t like doing something like this in an election year,” said Charles Calomiris, a professor at Columbia Business School who served as chief economist at a major banking regulatory agency under former President Donald Trump. “It’s very embarrassing.”
It is still unclear how far the Fed will go. The central bank still sees the possibility that inflation could cool on its own as supply chain bottlenecks ease and Congressional spending fades. At best, the Fed could raise rates from their ultra-low levels without having to go much further and constrain the economy.
But professional forecasters generally expect the central bank to have a stronger growth dent than to cut spending and ultimately inflation. Some economists estimate that the Fed will have to raise rates much higher than it currently expects to even get to a point where they are not contributing to price spikes themselves.
“The Fed has missed an opportunity to tighten without a recession,” Calomiris said. “The longer they delay and pretend they still have that chance, the more serious they will make it.”
After four decades of the Fed’s main funding rate almost never falling below 2.5 percent, the economy has now seen more than a dozen years of never climbing above that. point.
The central bank is now expected to continue raising funding costs at each of its rate-setting meetings, which will be held roughly every six weeks, for the remainder of the year. It will also observe the braking signals too strong.
“With inflation at its 40-year high, it’s hard to see the Fed willing to stop anytime soon,” said Beth Ann Bovino, US chief economist at S&P Global Ratings. “Looks like they’re ready to hit the accelerator.”
Fears of a Fed-induced recession in 2023 have grown, particularly when mixed with the economic fallout from the Russian invasion of Ukraine and renewed blockades in China. But some Fed observers are hoping it will be able to slow the economy without leading to a full downturn.
“It’s too early to say we have to have a recession,” said Krishna Guha, vice president of Evercore ISI and a former New York Fed official. But the process will not be delicate regardless, he added. “When we talk about a soft landing, we don’t really mean a super soft landing. We mean an irregular normalization “.