Federal Reserve Chair Jerome Powell has pledged to do whatever it takes to curb inflation, now raging at a four-decade high and defying the Fed’s efforts so far to tame it.
Federal Reserve Chairman Jerome Powell news conference is displayed on televisions while traders work on the floor at the New York Stock Exchange in New York on June 15, 2022. The Federal Reserve on Wednesday intensified its drive to tame high inflation by raising its key interest rate by three-quarters of a point — its largest hike in nearly three decades — and signaling more large rate increases to come that would raise the risk of another recession.
Not since 1994 has the central bank raised its key rate by that much all at once. And until Friday’s nasty inflation report, traders and economists had expected a rate hike of just half a percentage point Wednesday. What’s more, several more hikes are coming.The “soft landing” the Fed has hoped to achieve — slowing inflation to its 2% goal without derailing the economy — is becoming both trickier and riskier than Powell had bargained for.
“They are telling you: ‘We will do whatever it takes to bring inflation to 2%,’"said Simona Mocuta, chief economist at State Street Global Advisors. “I hope the data won’t require them to do whatever they’re willing to do. There will be a cost.’’“It’s not like there’s no way you can avoid it,’’ she said. “But it’s going to be hard to avoid it.’’
Indeed, since 1955 every time inflation ran hotter than 4% and unemployment fell below 5%, the economy has tumbled into recession within two years, according to a paper published this year by former Treasury Secretary Lawrence Summers and his Harvard University colleague Alex Domash. The U.S. jobless rate is now 3.6%, and inflation has topped 8% every month since March.
Only three months ago did the Fed start raising rates. By May, Powell was promising to keep raising rates until the Fed sees “clear and convincing evidence that inflation is coming down.’’Some of the factors that drove the economy’s recovery have meanwhile vanished. Federal relief payments are long gone. Americans’ savings, swelled by government stimulus checks, are back below pre-pandemic levels.
And there’s another byproduct of Fed rate hikes: The dollar will likely rise as investors buy U.S. Treasurys to capitalize on higher yields. A rising dollar hurts U.S. companies and the economy by making American products costlier and harder to sell overseas. On the other hand, it makes imports cheaper in the United States, thereby helping ease some inflationary pressures.
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