Big Fed rate hike seen as a certainty after poor inflation data

In this file photo, a chart displays market activity on the floor of the New York Stock Exchange (NYSE), Sept. 16, 2022, in New York City. AFP

The price spike has pushed annual inflation to its highest level in 40 years, inflicting pain on American consumers and businesses, despite the welcome drop in gasoline prices at the pump in recent weeks.

The disappointing consumer price report for August, released last week, showed housing, food and medical costs continue to rise. And when volatile food and energy prices are eliminated, what is known as core inflation picks up.

Families have grappled with rising prices initially triggered by strong demand as the world’s largest economy emerged from the pandemic amid supply chain rumblings. The situation has been exacerbated by Covid shutdowns in China and soaring energy and food prices due to Russia’s war in Ukraine.

It is not just the current high inflation that worries policymakers, but the fear that consumers and businesses are beginning to expect rising prices to become a permanent feature, which could trigger a dangerous spiral. and a phenomenon called stagflation.

This fear prompted the Fed to accelerate its rate hikes, rather than follow the more usual course of small, gradual steps over a longer period.

The US central bank has raised the key rate four times this year, including two consecutive three-quarter point hikes in June and July.

The aim is to raise the cost of borrowing and cool demand – and it’s having an impact: mortgage rates have now topped 6% for the first time since 2008.

A third massive hike is expected on Wednesday following the Fed’s two-day policy meeting. And some people are talking about the possibility of the US central bank taking an even bigger step.

But there are growing fears that this aggressive action could tip the US economy into recession, which would reverberate around the world.

“The searing core inflation numbers that came out this week for August have mounted pressure on the Federal Reserve to raise rates by one percentage point instead of 0.75. % at the next meeting,” said Diane Swonk, chief economist at KPMG US. said in an analysis.

“This will be one of the most difficult and politically charged decisions. It marks the Federal Reserve’s first step toward a true recession.”

Avoid a repeat of the 1970s

Fed Chairman Jerome Powell has made it clear that a recession is a risk he is willing to take. In fact, it is a risk the central bank must take to avoid an even more disastrous outcome: a repeat of the damaging and runaway inflation of the 1970s and early 1980s.

“We must act now frankly, firmly as we have done and we must continue until the job is done,” Powell said in his final public comments before the political meeting.

Powell’s predecessor from the last era of high inflation, Paul Volcker, had to take extreme measures after rising prices took root, resurging and surpassing the peak of the mid-1970s after repeated unsuccessful efforts to tame them.

This led to a deep recession and double-digit unemployment.

The Fed’s goal is to avoid “the kind of very high social costs” of the Volcker era and maintain public confidence in the central bank’s commitment to fighting inflation.

“Time is running out,” warned Powell.

While the latest data shows that annual inflation in the United States slowed slightly to 8.3% in August – from a peak of 9.1% in June – prices actually accelerated slightly during the month, reflecting widespread price increases.

Central bankers have the luxury of a strong job market, low unemployment and a resilient US consumer, but many economists now see a recession as likely.

Former US Treasury Secretary Lawrence Summers is among those warning that unemployment will have to rise to bring inflation under control.

He is also in favor of more aggressive action by the Fed.

“If I had to choose between 100 bps in September and 50 bps, I would choose a 100 bps move to build credibility,” Summers said in a recent tweet.

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Ramon J. Espinoza