The Federal Reserve raised interest rates by 0.75% on Wednesday as the central bank tries to fight inflation by decreasing consumer spending, but some economists aren’t convinced that it’ll be enough to stop inflation, or that it won’t push the economy into a recession.
The federal funds rate, the main interest rate that the Federal Reserve manipulates to control the economy, now stands between 2.25% to 2.50%, up from between 1.5% to 1.75%, according to the Federal Reserve’s press release. The Federal Reserve has been fighting inflation by raising rates since March, issuing a massive rate hike of 0.75% in June, but prices have continued to climb, with the consumer price index registering 9.1% year-over-year in June.
The Federal Reserve hikes rates by 75 BPS.
— unusual_whales (@unusual_whales) July 27, 2022
The past two months’ combined 1.50% rate increase is the largest in over 30 years, Bloomberg reported.
However, many investors and economists are skeptical that the Fed can achieve a so-called “soft-landing,” where it tackles inflation without triggering a recession, according to CNBC. In advance of the Fed’s rate hike announcement, 63% of economists surveyed by CNBC said that the necessary rate hikes to get back to the Fed’s 2% target rate of inflation would trigger a recession, while just 22% said it would not.
Part of the reason for this, according to E.J. Antoni, research fellow for regional economics at the Heritage Foundation, is that interest rates will likely have to come up considerably more to adequately tackle inflation, putting considerable downward pressure on economic growth.
“The last time inflation was this high, the federal funds rate was over 13%,” Antoni told the Daily Caller News Foundation, noting that that’s a marked contrast from the 2.25% to 2.50% that it is currently at.
The size of the rate hike is what markets had expected, with futures pricing before the announcement implying a roughly 80% chance of a 0.75% increase in the Fed’s target rate, according to Barron’s. The remaining 20% chance was that the Fed would opt for a particularly aggressive full percentage point rate hike.
Raising interest rates is the Fed’s policy of choice when inflation is running hot because that makes it more expensive to borrow money for big ticket purchases like houses or cars, and therefore demand for such items comes down, bringing prices down as well, USA Today reported.
But by definition, decreasing spending and consumption slows down the economy, according to Barron’s. (RELATED: The White House Wants To Redefine ‘Recession’ Ahead Of Possibly Disastrous GDP Report)
“Interest rates are a multi-edged sword, they have multiple impacts and [can be] very damaging on certain elements of our economy,” Democratic Sen. Ben Cardin of Maryland told The Hill.
“There’s going to be some more near term pain, and I don’t think they’re done raising interest rates. Look, my first house I bought when rates were at 12%. We may be headed back there,” former advisor to Vice President Mike Pence, General Keith Kellogg, told the DCNF.
Getting rates up high enough to negate inflation might just cause a recession, chief economist at Moody’s Analytics Mark Zandi told the Hill.
“We’re on the precipice. It won’t take a lot to push us over,” Zandi said.
Fed Chair Jerome Powell has repeatedly said that tackling inflation is the central bank’s top concern, even if that means causing a recession, but the ideal outcome would be finding the delicate balance of reigning in inflation while not harming growth.
“The question is, are they sufficiently sensitive to the risk of overdoing it and causing an unnecessary recession,” economics professor and journalist Paul Krugman told PBS.
“It’s the worst of both worlds. There’s no good answer,” Karen Shaw Petrou, managing partner at Federal Financial Analytics, told The Hill.
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