As expected, the Federal Reserve announced a 0.75% increase in the benchmark interest rate on Wednesday. the third increase of this size since June and the fourth overall rate increase this year.
The frequency and size of the rate hikes are the fastest in decades and are part of the Fed’s aggressive strategy to end persistently high US inflation. While this tactic is already showing signs of increasing the cost of consumer debt, an outcome the Fed advocates in its efforts to reduce aggregate consumer demand, some economists worry that this approach will push the US economy into recession.
Fed officials also forecast they will raise their benchmark rate to around 4.4% by the end of the year from the current range of 3% to 3.25%, a full percentage point higher than they predicted in June. And they expect to raise the rate next year to about 4.6%. This would be the highest level since 2007.
Those high rates would be in what the Fed calls “constraint” territory, meaning they would be designed to sharply slow borrowing and spending, cool hiring and wage growth and beat high inflation.
Fed officials said they were looking for a “soft landing” that would allow them to slow growth enough to curb inflation but not enough to trigger a recession. Still, economists are increasingly saying they think the Fed’s sharp rate hikes will eventually lead to job cuts, higher unemployment and a full-blown recession late this year or early next year.
How do interest rate hikes affect inflation?
The Fed’s rate hikes are designed to increase the cost of debt, a way to cool consumer spending and ultimately reduce inflation by satisfying demand. And in some ways, those efforts are paying off.
last week, Mortgage rates exceeded the 6 percent threshold and hit their highest point since 2008, raising pressure on the US housing market and prices even more potential home buyers.
Freddie Mac predicts that high rates will continue to hold back demand in the US. Although the inventory of homes for sale is increasing, it still remains at an “insufficient” level, which means house prices are falling likely to continue – but not fall off a cliff.
And the average interest rate on credit cards this month reached 17.96% – the highest rate since 1996. Bankrate.com.
Bankrate senior industry analyst Ted Rossman reported this MarketWatch that for those with credit card debt, this means your rate may fluctuate as a result.
“Rate increases across the board are affecting new and existing balances,” Rossman said, adding that “most credit card holders are now facing rates that are 225 basis points higher than they were just six months ago.”
Is the Fed’s strategy working?
But while the cost of mortgages and the accumulation of consumer credit card debt are rising, which are exactly the results the Fed hopes to see, other consumer trends are offsetting the dampening effect of the rate hike.
These factors include a US labor market that continues to run hot and still strong consumer spending.
In August, employers created 315,000 jobs According to the latest report from the US Department of Labor, the national unemployment rate rose to 3.7% from a 50-year low of 3.5% in July. Hiring numbers were down from a whopping 526,000 new hires in July, but August’s volume was still well above pre-pandemic levels and job listings still far outnumbered the available workers to fill them.
Data from the Labor Department showed that eight out of 13 categories of retail spending rose in August by per CNN. Spending at retail food and beverage stores rose 0.5% for the month and rose 7.2% over the past year. Sales at restaurants and bars, as well as at car dealerships, rose by 2.8% over the month. Expenditures on building materials and equipment, clothing and sports goods also increased.
Is the US economy headed for a recession?
When the Fed meets on Wednesday, mixed economic signals will lead to another big rate hike, but Powell noted at a conclave in Jackson Hole that “our decision at the September meeting will depend on the mix of inputs and the changing outlook.”
While interest rates on consumer debt are likely to continue to escalate amid further Fed hikes, there is also the prospect that this strategy could push the US economy into a prolonged economic downturn, also known as recession.
Billionaire CEO Barry Sternlicht said last week CNBC that the US economy is teetering on the brink of a major recession unless the Federal Reserve slows rate hikes.
Sternlicht said the Fed reacted too slowly when the first signs of an uptick in inflation appeared and is now acting too aggressively in an attempt to catch up.
“The economy is slowing down a lot,” the chairman and CEO of Starwood Capital Group told CNBC.Squawk Box» on Thursday. “If the Fed keeps going like this, they’re going to have a major recession and people are going to lose their jobs.”
Contribution: Associated Press