The Fed raises the interest rate 0.75 percentage points to control inflation and anticipates aggressive increases in the future. What does it mean to you?

WASHINGTON – The Federal Reserve launched a third lopsided interest rate hike on Wednesday in an effort to squash high inflation, but economists fear the campaign is increasingly at risk of a recession next year.

The Fed raised its key short-term rate by three-quarters of a percentage point to a range of 3% to 3.25%, a higher-than-normal level designed to ease inflation by slowing the economy. It also significantly increased its forecast of what that rate will be at the end of this year and 2023.

Fed officials now predict the key rate will end 2022 in a range of 4.25% to 4.5%, a full percentage point above the 3.25% to 3.5% they projected in June, and close next year by 4.5% to 4.75%, according to their median estimate. That suggests the central bank could approve another three-quarter-point rate hike at its November meeting and then a half-point rate hike in December.

But a year or two from now, as higher rates curtail economic activity, Fed policymakers expect growth to weaken substantially. The central bank expects to cut the fed funds rate by about three-quarters of a point in 2024, presumably in response to an economic slowdown or possibly a recession.

Impact of the rate hike on you: This is how it could affect your wallet and purse

How the Federal Reserve works: Why is the Fed raising interest rates? And how do those increases reduce inflation?

Federal Reserve Chairman Jerome Powell said on August 26, 2022, that the Federal Reserve is committed to bringing inflation down to its 2% target, which means interest rates will continue to rise.

Federal Reserve Chairman Jerome Powell said on August 26, 2022, that the Federal Reserve is committed to bringing inflation down to its 2% target, which means interest rates will continue to rise.

The economy is already going backwards. In a statement after a two-day meeting, the Fed said: “Recent indicators point to modest growth in spending and output,” but “job gains have been strong…and the unemployment rate has kept low.”

He added that he “anticipates continued increases” in the fed funds rate “will be appropriate.”

2-year Treasury yield and stocks react

Stocks reversed course again and turned positive during Powell’s press conference after falling into negative territory following the announcement.

Stocks gained their biggest boost after Powell said the central bank could envision a point where rate hikes would stop, but warned “we’re not at that level yet.” 2:57 p.m. ET. The S&P 500 was up 28 points, or 0.7%, and the Nasdaq Composite was up 108 points, or 1%.

Yields on 2-year Treasury notes fell to around 4% after jumping above 4.1% earlier, the highest level since 2007.

What was the Fed rate hike today?

Wednesday’s rate hike of 0.75 percentage point is expected to ripple through the economy, raising rates on credit cards, home equity line of credit and other loans. 30-year fixed mortgage rates have risen above 6% from 3.22% earlier this year. At the same time, households, especially seniors, are finally reaping higher returns on bank savings after years of paltry returns.

Barclays says Fed policymakers had no choice but to raise rates sharply again after a report last week revealed that inflation, as measured by the consumer price index (CPI), rose 8.3% year over year in August, down from June’s 40-year high of 9.1%. but above the expected 8%.

Additionally, employers added 315,000 healthy jobs in August and the average hourly wage rose a strong 5.2% year over year. That could fuel more price increases as companies struggle to maintain profit margins.

Markets trying to predict where rates are headed reckoned there was an 18% chance Fed policymakers would raise rates by a full percentage point on Wednesday.

Are we in a recession in 2022?

But Goldman Sachs economist David Mericle says little has changed since Fed Chairman Jerome Powell told reporters in late July that the pace of rate hikes would likely slow to account for the larger recession risk. Rather, he says, the Fed is trying in part to send a message to stock markets that had until recently become complacent about the prospect of more rate hikes.

Growth is slowing as the Fed raises borrowing costs. The Fed said on Wednesday that it expects the economy to grow just 0.2% this year and 1.2% in 2023, down from its June estimate of 1.7% for both years, based on the median of the estimates. of the officials.

He forecasts unemployment of 3.7% to rise to 4.4% by the end of next year, well above his previous forecast of 3.9%.

And the Fed’s preferred annual inflation measure, which is different from the CPI, is expected to decline from 6.3% in August to 5.4% by the end of the year, slightly above the previous forecast of 5.2% from Fed officials, and 2.8% by the end of 2023. That would be moderately above the Fed’s 2% target.

Even without big rate hikes by the Fed, inflation is expected to slow as supply chain bottlenecks are eased, commodity prices fall, a strong dollar lowers import costs. and retailers offer deep discounts for reduced and inflated inventories. However, Powell has said it’s critical for the Fed to raise rates to lower consumers’ inflation expectations, which may weigh on real price increases.

A growing number of economists believe that the Fed’s aggressive campaign (its key rate started in 2022 near zero) will drive the economy into recession. Economists say there is a 54% chance of a recession next year, up from a 39% chance in June, according to a survey by Wolters Kluwer Blue Chip Economic Indicators.

For months, Fed Chairman Jerome Powell said he thought the central bank could control inflation without triggering a recession. But in a speech last month at the Fed’s annual conference in Jackson Hole, Wyoming, he acknowledged that higher rates and slower growth “will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation.”

This article originally appeared on USA TODAY: The Fed raises the interest rate again to curb inflation; what it means to you

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