Intensifying its war against high inflation, the Federal Reserve raised its key interest rate by three-quarters of a point for the third time in a row and signaled more significant rate hikes ahead. It is an aggressive pace that will increase the risk of an eventual recession.
The Fed’s move boosted the benchmark short-term interest rate, which affects many consumer and business loans, to a range of 3% to 3.25%, the highest level since early 2008.
Officials also predicted that they would raise their benchmark rate to nearly 4.4% by the end of the year, a full point higher than they had expected as recently as June. They expect to raise the rate again next year to around 4.6%. This will be the highest level since 2007.
By raising borrowing rates, the Federal Reserve makes it more expensive to obtain a mortgage or business loan. Consumers and businesses then borrow and spend less, which cools the economy and slows inflation.
Lower gas prices slightly lowered headline inflation, which was still a painful 8.3% in August compared to a year earlier. These lower gas pump prices may have contributed to the recent surge in President Joe Biden’s public approval ratings that Democrats hope will bolster their expectations in the November midterm elections.
Speaking at a press conference, Federal Reserve Chair Jerome Powell said that before Fed officials would consider halting rate hikes, they “want to be very confident that inflation will come back down” to their 2% target. He pointed out that the strength of the labor market fuels wage gains that help to raise inflation.
He stressed his belief that curbing inflation is vital to ensuring the long-term health of the labor market.
Powell said, “If we want to light the way to another period of a very strong labor market, we have to get inflation behind us. I wish there was a painless way to do it. There isn’t.”
Federal Reserve officials said they are seeking a “soft landing,” in which they can slow growth enough to tame inflation but not so much as to trigger a recession. However, most economists are skeptical. They say they believe that sharp increases in interest rates by the Fed will, over time, lead to job cuts, increased unemployment, and a full-blown recession late this year or early next.