How much “hurt” is the Fed willing to do? Wednesday’s rate hike will provide clues

Washington, DC
CNN business

The Federal Reserve is expected to raise interest rates by three-quarters of a percent on Wednesday for the third time in a row in an aggressive move to combat runaway inflation plaguing the economy, frustrating consumers and choking the Biden administration.

Another massive hike would mark the central bank’s toughest policy in the fight against inflation since the 1980s — another period of higher prices. It would also likely cause economic pain for millions of American businesses and households by raising the cost of borrowing for home, auto and other loans.

The Fed’s planned actions would raise the rate banks charge each other for overnight lending to 3-3.25%., The highest since the 2008 global financial crisis.

Federal Reserve Chairman Jerome Powell has acknowledged the economic pain this rapid tightening regime could cause.

“We have to keep at it until the job is done,” he said at a forum of central bankers in Jackson Hole, Wyoming. “While higher interest rates, slower growth and softer labor market conditions will lower inflation, they will also hurt households and businesses. These are the unfortunate costs of reducing inflation. But restoring price stability would hurt much more,” he warned.

Investors and economists will be eagerly awaiting the clarity that comes with this “pain”. So far, the Fed’s series of aggressive rate hikes means consumers are now being charged the highest credit card rates since 1996, mortgage rates are above 6% and auto loans are at their highest since 2012, Bankrate senior analyst Greg McBride said.

Powell’s comments from Jackson Hole also came ahead of fresh economic data showing that inflation, as measured by the latest Consumer Price Index report, was still elevated at 8.3% in the year ended August. Also, the July-August monthly reading showed inflation rose 0.1%, when most economists had expected it to slow. Core CPI, (which strips out volatile components such as food and gas) rose twice as much as economists had expected. This caused a contraction on Wall Street.

Higher prices mean consumers are spending about $460 more per month on groceries than last year, according to Moody’s Analytics. However, the labor market remains strong, as does consumer spending. House prices remain high in many areas, although there has been a significant increase in mortgage rates. That means the Fed may feel the economy can swallow more aggressive rate hikes.

Some economists expect the Fed to implement a dramatic and historic full-point rate hike on Wednesday. Although it would come as a big surprise at this point, August inflation data it led to calls for mass movement.

Economists at brokerage Nomura Securities, for example, changed their forecast from 75 basis points to 100 points. last week Former Treasury Secretary Larry Summers said he doesn’t think gradual interest rate hikes are driving down high prices: The Fed has raised rates four times already this year, noting that inflation remains near 40-year highs.

But the Federal Reserve is unlikely to raise rates by a full percentage point. The consensus among economists and Wall Street analysts is still 75 basis points higher, Projecting a larger increase of 18%, according to the CME FedWatch Tool.

Regardless of the path the Fed chooses, these are big rate hikes that would have been unimaginable just a few months ago, and markets don’t often welcome interest rate hikes, which can negatively impact earnings and stock prices.

That may be what the Fed wants. Some economists believe that a volatile market is a good thing, and at least one Fed official agrees.

Neel Kashari, president of the Federal Reserve Bank of Minneapolis, said last month that he was happy markets had sunk after Powell warned he would be in pain. That meant people understood the seriousness of the Fed’s commitment to return inflation rates to 2%, he said.

The Fed wants a “weaker stock market”. They want higher bond yields,” former New York Federal Reserve Chairman Bill Dudley told CNN in May. “I think the stock market is finally picking up on that.”

Investors may be hoping for a dovish pivot, but Powell aims to end the market’s “addiction to Fed easing when stocks fall,” said Danielle DiMartino Booth, CEO and chief strategist at Quill Intelligence.

What else investors are watching: The Federal Reserve will also release its quarterly forecasts on inflation, the economy and the future path of interest rates on Wednesday evening. Investors will look to the central bank’s outlook for future rate hikes and gauge how policy officials will affect the economy through their actions.

“Expect a broad-based increase in unemployment forecasts for next year as the Fed further explains what the necessary ‘pain’ means for the economy,” said Jeffrey Roach, chief economist at LPL Financial.

The Federal Reserve announced its rate hike decision on Wednesday at 2:00 PM ET at the end of its two-day meeting. After that, there will be a press conference at 14:30 with Fed President Powell