The Feds Plan to Fight Inflation

The Federal Reserve is raising interest rates for the third time this year as it seeks to fight rising inflation running at the fastest pace in over 40 years, and the big question for many has been how much it will lift rates?

Before the latest consumer prices report earlier this month, most market watchers and economists expected a0.5-percentage-point hike. But now, more are anticipating a 0.75-point increase – which would be the largest in nearly 30 years. The risk is that higher rates will push the economy into a recession, a fear aptly expressed by the recent plunge in the S&P 500 stock index, which is down over 20% from its peak in January, making it a “bear market.”

TheFederal Open Market Committee, the Fed’s policymaking arm, is currently pondering how much to raise its benchmark interest rate. The stakes for the U.S. economy, consumers and businesses are high.

In recent weeks, Fed Chair JeromePowell has signaled that the U.S. central bank would likely increase the rate by 0.5 percentage point to a range of 1.25% to 1.5%. But markets and Wall Street economists are now anticipating a larger 0.75-point hike because the May consumer price data suggest inflation has been unexpectedly stubborn. Some Wall Street analysts also suggest a 1-percentage-point hike is possible.

Since the latest consumer price index data came out onJune 10, the prospect of a faster pace of rate hikes has led to financial markets plunging 5%. Investors worry the Fed may slow the economy too much in its fight to reduce inflation, which if left unchecked also poses serious problems for consumers and companies. A recent poll found that inflation is the biggest problem Americans believe the U.S. is facing right now.

In order to stabilize prices while not hurting employment, the Fed is expected to increase interest rates rapidly in the coming months – and it currently forecasts rates to be at least 1 percentage point higher by 2023. It has already lifted its benchmark rate twice this year by a total of 0.75percentage point.

Historically, when the Fed has had to raise rates quickly, economic downturns have been difficult to avoid, leaving many to speculate on whether they will be able to manage a soft landing this time. Powell has insisted that its policy tools have become more effective since its last inflation fight in the 1980s, making it possible this time to stick the landing. Many economists and other observers remain uncertain. And a recent survey of economists notes that many anticipate a recession beginning next year.