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The Federal Reserve Is Expected to Use a Strong Hand to Combat Rising Inflation

On Wednesday, the Federal Reserve will wrap up a two-day policy meeting and is expected to take action to combat rising inflation, including possibly raising interest rates to levels not seen in decades.

The Fed raised rates by a quarter-point at its most recent meeting in mid-March. It was the first time the federal funds rate had been increased since 2018, and it came after two years of rate cuts and emergency measures to combat the COVID-19 pandemic.

Many analysts expect the Federal Open Markets Committee to order a half-point rate hike at the end of its meeting on Wednesday, the most significant single hike in 22 years.

Many investors believe the Fed will raise rates at each of its next three policy meetings scheduled for June, July, and September.

The move would be the Fed’s most potent yet against inflation, which rose by nearly 7% in the year ending in March, the highest rate since 1982.

The Commerce Department reported last week that the Personal Consumption Expenditures price index — a leading indicator of inflation — increased by 6.6 percent, while gross domestic product — the total output of all goods and services — shrank unexpectedly by 1.4 percent, despite most economists expecting modest growth of about 1%.

The Federal Reserve’s target range is 2%, which is the rate at which it prefers to see inflation rise annually. In March, the indicator indicated a more than threefold increase in inflation.

The Federal Reserve Is Expected to Use a Strong Hand to Combat Rising Inflation (2)
The Federal Reserve Is Expected to Use a Strong Hand to Combat Rising Inflation

Furthermore, high demand has outstripped what businesses can provide, with some employers struggling to find enough workers to operate at total capacity.

According to the Labor Department, job openings reached 11.5 million by the end of March, a new high, compared to about 6.3 million separations. That means that there are roughly two open positions for every unemployed adult in the United States.

In addition to raising interest rates, the Fed is expected to announce a $95 billion per month program to reduce its $9 trillion balance sheet beginning in June.

This week, Chairman Jerome Powell of the Federal Reserve said that the central bank aims for a “soft landing” by raising interest rates to discourage spending enough from reducing inflation without triggering a recession.

He stated, “That is our goal.” “I don’t think anyone at the Fed will say that’s going to be simple or easy.”

Fed policymakers said at their March meeting that rates would have to rise nearly 2 points this year and even more in 2023 to achieve this. According to Powell, who spoke at an International Monetary Fund forum last month, this would necessitate the central bank to hike rates aggressively, then monitor the economy’s performance and adjust the rate hike pace accordingly.

“I think it’s appropriate to be moving a little faster,” he said. “I also believe there’s something to be said for front-loading whatever accommodations one deems appropriate.”

While most economists expect a half-point hike on Wednesday, JPMorgan economists say there’s a 20% chance the Fed will go for a three-quarter-point walk, which the market did not price in ahead of the meeting.

The Federal Reserve Is Expected to Use a Strong Hand to Combat Rising Inflation (1)
The Federal Reserve Is Expected to Use a Strong Hand to Combat Rising Inflation

According to CNBC, Jim Caron, a chief fixed-income strategist on the global fixed-income team at Morgan Stanley Investment Management, “It seems like they’re dead set on hiking rates enough to kill inflation.” “However, that is the real debate.”

“Are they aiming for 2% inflation by 2024?” If they are, wage inflation will be relatively high, necessitating even more tightening than the Fed anticipates.”

One thing is sure: the Fed will raise interest rates on Wednesday. Keeping them the same would do nothing to address the United States’ rising prices, which President Joe Biden has promised to address.

The rising cost of gas has been one of the primary drivers of inflation over the last year. According to AAA, the national average was $4.23 on Wednesday, up 2 cents from Tuesday and about 10 cents from a week ago.

Prices at the pump have been dropping in recent weeks, thanks to improving market conditions and President Joe Biden’s policy actions. Prices are rising again due to the ongoing conflict in Ukraine, the US embargo on Russian oil, and the start of the busier summer driving season.

Raising interest rates would make it more expensive for Americans to take out a loan, carry a credit card balance, or buy a home, but it has long been an effective way to keep inflation from spiraling out of control.

According to Freddie Mac, rates for a 30-year fixed-rate mortgage hit an average of more than 5% last month, which is nearly 2% higher than a year ago. Due to rising mortgage rates, limited inventory, and the Federal Reserve’s rate hike on Wednesday.

According to the most recent data available from the National Association of Realtors, existing-home sales have decreased by nearly 3% due to the volatile market conditions.

Realtors have reported steady sales in some of the country’s fastest-growing markets, such as New York’s Hudson Valley.

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“Interest rates have risen dramatically in the last two months, from 3.5 percent to 5.5 percent, and I don’t see that affecting competition,” Ryan Basten, a broker associate in Ulster County, N.Y., told The Washington Post. “If it gets to 6%, 7%, or 8%, people might have a knee-jerk reaction, but I haven’t seen it yet.”

On Wednesday afternoon, Biden is scheduled to speak about the Fed’s decision. He’ll speak at 11 a.m. EDT in the Roosevelt Room of the White House, just hours before the Federal Reserve announces its rate decision.

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