The Federal Reserve on Wednesday approved its third consecutive 75-basis-point interest rate hike and signaled additional large increases were on the table as policymakers look to combat rising inflationary pressures.
The rate hike followed last week’s Consumer Price Index (CPI) report, which showed annual inflation running at 8.3%, a level not seen since the early 1980s, as reported in The Dallas Express.
With consumer prices running near a 40-year high and Federal Reserve Chairman Jerome Powell indicating inflation will not come down without causing some level of economic pain, the U.S. central bank chose to raise its federal funds rate between 3-3.25% in an effort to stay ahead of the curve and bring inflation down to the Fed’s 2% target range.
The Fed chair said he recognizes the burden elevated interest rates and high inflation have on the average consumer but that rates would continue to go up “until the job is done.”
“My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher cost of essentials,” Powell said. “We have got to get inflation behind us. I wish there was a painless way to do that; there isn’t,” he told reporters.
August’s CPI data on a month-over-month basis showed a sharp decline in gasoline prices, used cars, and airline tickets. In contrast, noticeable increases were felt in rent prices, food, and electricity.
Measuring the monthly increase from July to August, rent rose by 0.7%, groceries by 0.8%, and electricity by 1.5%, according to the latest CPI data. Rent was the biggest contributor to inflation for the month.
In an interview with The Dallas Express, Stephen Patterson, director of client relations at Southlake-based KeyCity Capital, stressed his concern for middle-class families and the damaging effects higher interest rates could have on their finances.
Frustrated by a lack of actionable public policy that addresses inflation in the short term, Patterson questioned what policymakers on the federal level are doing to “unkink” supply-side issues that have contributed to higher consumer prices.
“Monetary policy will only go so far to bring down inflation,” Patterson told The Dallas Express.
What the country really needs, he said, is a “robust increase in domestic energy and manufacturing production” brought on by sweeping “public policy changes.”
Powell has historically dodged questions around public policy solutions, choosing instead to direct public policy-related concerns to legislators in Washington.
“Having that disconnect is exasperating the problem,” Patterson said, referring to the different functions that public policy and monetary policy play in the United States.
Projections from Wednesday’s Federal Open Market Committee (FOMC) meeting indicate the Fed will raise rates by at least 1.25% through the end of the year: 0.75 percentage points in November and 0.50 in December.
A recession is possible if inflation fails to respond to more aggressive rate hikes, Powell warned during Wednesday’s speech, conceding that a “soft landing” was becoming less likely.
“No one knows whether this process will lead to a recession or, if so, how significant that recession will be,” he said.
With the terminal rate (the point at which the Fed thinks it can stop hiking interest rates) set at 4.6% in 2023, Americans can expect another full year of restrictive monetary policy, which will further the squeeze on everyday consumers. This is supported by the “dot plot” of expectations, which do not predict rate cuts until 2024.
The dot plot shows projections for the federal funds rate, with each “dot” representing the estimates by Fed participants on the target range by the end of the year.
The next FOMC meetings will take place November 1-2 and December 13-14.