WASHINGTON: US central bankers opened their two-day policy meeting on Tuesday (September 20) with another steep rate hike that was almost certainly seen amid stubbornly high inflation.
American families have been feeling price pressures, which have risen at their fastest pace since the early 1980s, and Federal Reserve Chairman Jerome Powell has made it clear that officials will continue to act aggressively to cool the economy.
Many economists expect a third consecutive three-quarter point rate hike when the meeting closes on Wednesday, a move unprecedented in decades.
Fed officials are united in the message that the US central bank cannot run the risk of inflating inflation due to the damaging effects on workers and businesses, but analysts warn that the risks of a recession are mounting.
“Inflation will continue to lead the way in monetary policy despite mounting risks of a recession in 2023,” said Kathy Bostjancic of Oxford Economics, who expects a downturn early next year.
“We see prolonged inflation, more aggressive Fed monetary policy tightening and negative spillovers from a weakening global backdrop pushing the US economy into a mild recession in H1 2023.”
The Fed’s policy-making Federal Open Market Committee (FOMC) will announce its decision Wednesday at 1600 GMT.
Markets have been rocked in recent days by the outspokenly aggressive statements from central bankers, closing again lower on Tuesday after a brief rebound on Monday.
Investors and analysts will be watching Powell’s press conference closely after the meeting for information on what he thinks the next steps will be and how high interest rates could go.
COMING MORE WALKS?
Despite the welcome drop in petrol prices at the pump in recent weeks, the disappointing consumer price report for August released last week showed housing, food and medical costs continued to rise. And when volatile food and energy prices are stripped down, so-called core inflation accelerated.
It is not only the current high inflation that worries policymakers, but also the fear that consumers and businesses will expect rising prices will become a permanent feature, which could trigger a dangerous spiral and a phenomenon called stagflation.
That fear has prompted the Fed to push forward its rate hikes, rather than taking the more common path of small, gradual steps over a longer period of time.
The US central bank has raised the borrowing rate four times this year, including two consecutive three-quarters hikes in June and July.
The goal is to raise the cost of borrowing and cool demand – and it’s having an effect: housing mortgage rates have now risen above six percent for the first time since 2008.
And recent statements from Fed officials indicate that there will be more rate hikes, not cuts, until inflation is under control — dispelling the hopes built up in the markets after the July policy meeting.
The FOMC will also release members’ quarterly forecasts, showing how they feel about the direction of the economy and the impact of the policy changes, and how quickly inflation will decline.