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The Fed commits even more to inducing a 'growth recession' as it raises interest rates at an extra-fast pace for the third time in a row

Jerome Powell at the July 2022 FOMC press conference.
U.S. Federal Reserve Chair Jerome Powell attends a press conference in Washington, D.C., the United States, on July 27, 2022
  • The Fed lifted interest rates by another 0.75 percentage points on Wednesday, marking the third such hike in a row.
  • Higher rates make borrowing more expensive and are the Fed's best tool for cooling inflation.
  • The increase extends a streak of larger-than-usual hikes as inflation remains historically fast.

For the Federal Reserve, 0.75 percentage points is the new 0.25.

The Federal Open Market Committee raised interest rates by three-quarters of a percentage point on Wednesday, marking the third consecutive hike of that size. The increase is three times larger than the Fed's typical uptick and extends a streak of aggressive hiking that aims to cool demand throughout the economy and pull inflation lower.

"The Committee decided to raise the target range for the federal funds rate to 3 to 3.25 percent and anticipates that ongoing increases in the target range will be appropriate," the committee said in a statement. All 12 voting members of the committee voted unanimously for the hike.

The benchmark rate's range is now the highest since 2008. The Wednesday hike lifts the rate well above 2.5%, a threshold most officials regard as the "neutral rate" because it's expected to neither stimulate nor restrain the economy. In lifting rates above that level, the FOMC is betting the economy is strong enough to endure some restriction without sliding into a recession.

The FOMC also unveiled an updated set of members' economic projections. Policymakers' median estimate for the 2022 unemployment rate rose to 3.8% from 3.7%. The projected rate in 2023 and 2024 rose to 4.4%, up from the prior estimates of 3.9% and 4.1%, respectively. The revisions from the June projections signal the Fed's hiking cycle will have a much harsher effect on the labor market and lead to significant layoffs over the next few years.

Officials also expect growth to come in lower than they had expected in June. Gross domestic product is expected to climb just 0.2% through 2022, down from the previous 1.7% projection. Growth is then seen accelerating to 1.2% next year and 1.7% in 2024, but both figures are down from the prior projections of 1.7% and 1.9%, respectively.

Projections for the Fed's benchmark rate hint several more larger-than-usual hikes are on the docket for the committee's last two meetings of the year. Median projections signal the rate will hit 4.4% by the end of 2022, implying another three-quarter-point hike in November and a half-point increase in December. The rate is then seen rising to 4.6% in 2023 before falling to 3.9% by the end of 2024.

The latest hike comes as the Fed finds itself in an increasingly difficult bind. Higher interest rates are the central bank's best tool for countering high inflation. Yet it can take about a year for the effects of a rate hike to reverberate throughout the economy and actually pull inflation lower.

And as rate hikes slowly weigh on demand, inflation remains historically elevated. Data published last week showed prices still climbing 8.3% in the year through August as well as 0.1% last month alone. Both readings came in above economists' forecasts, signaling the price-growth problem isn't fading as quickly as experts hoped. 

The adverse effects of lifting rates, meanwhile, have already emerged. Borrowing costs have surged throughout 2022, affecting everything from mortgage rates to credit-card interest payments. That's placed new financial strain on countless households.

It's also broadly slowed economic activity. Higher debt costs have led companies to rein in their hiring plans, and job creation has eased up from its breakneck pace. As the Fed lifts rates through the rest of the year, economists expect spending to cool further and for the labor market to soften.

Expectations of slower overall growth have intensified concerns that the Fed is steering the US into a growth recession. The term describes a period of below-average growth, rising unemployment, and slowing inflation, and is a less-than-ideal way for the central bank to solve the inflation problem. A growth recession would likely see millions of Americans lose their jobs and the economy suffer a few years of weakness before returning to healthy growth. Wage increases would slow dramatically, and though inflation would likely cool down, households would still have to contend with higher borrowing costs.

Fed Chair Jerome Powell hinted that such pitfalls will likely emerge as the fight against inflation ramps up, saying in August that slowing price growth would "bring some pain" to households and businesses. The near-term damage will be worth it if it pulls inflation to sustainable levels, he added.

Read the original article on Business Insider

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