In an aggressive drive to combat the white-hot inflation that is afflicting the economy, upsetting consumers, and constraining the Biden administration, the Federal Reserve is anticipated to hike interest rates on Wednesday by 0.75% for the third time in a row.
The central bank’s strongest policy action in its battle against inflation since the 1980s, another era of sky-high prices, would be to impose another significant hike. Additionally, it would probably hurt the economy for millions of American people and businesses by making borrowing money for homes, vehicles, and other loans more expensive.
The rate that banks charge one another for overnight borrowing would rise to 3-3.25% as a result of the Fed’s planned moves, which would be the highest level since the 2008 global financial crisis.
Jerome Powell, the chairman of the Federal Reserve, has acknowledged the potential economic harm that this rapid tightening regime may bring.
At a central bankers’ symposium in August in Jackson Hole, Wyoming, he declared, “We must stick at it until the work is done. “While slower GDP, higher interest rates, and a softer labor market will help to reduce inflation, they will also hurt some people and companies. These are the regrettable consequences of lowering inflation. However, failing to achieve price stability will result in much more suffering, he said.
Investors and economists will be anticipating information on what that “pain” involves with great interest. According to Greg McBride, senior economist at Bankrate, the Fed’s aggressive rate increases have resulted in customers paying the highest credit card rates since 1996, the highest mortgage rates since 2012, and the highest auto loan rates since 1996.
Powell’s Jackson Hole remarks also came before fresh economic information showing that inflation, as determined by the most recent Consumer Price Index report, is still high at 8.3% for the year that ended in August. In addition, the monthly data from July to August revealed that headline inflation increased by 0.1%, contrary to the expectations of the majority of economists. Core CPI, which excludes volatile items like food and gas, increased by twice as much as forecast by economists. That caused Wall Street to crash.
According to Moody’s Analytics, the higher costs mean that households are spending around $460 more per month on groceries than they were at this time last year. However, both the labor market and consumer spending are still robust. Despite a significant increase in mortgage rates, housing costs are still expensive in many places. Therefore, the Fed might believe that the economy can withstand more drastic rate increases.