The odds of the Federal Reserve slashing inflation without causing a painful economic downturn fell again on Wednesday, as the U.S. central bank adopted what is expected to be the most aggressive campaign to tighten monetary policy. decades.
After approving the largest interest rate hike since 1994, bringing the federal funds rate to a new target range of 1.50% to 1.75%, the Fed indicated that the political rate could rise well above 3% by the end of the year, reaching a level. Jay Powell said the president was expected to be “modestly restrictive” of economic activity. More rate hikes are also expected in 2023.
The drastic measures reflect a greater sense of panic that has recently surrounded the Fed as it struggles with the worst inflation in four decades and growing evidence that the problem could get worse before it gets better.
In his post-decision press conference, Powell delivered the general message that the central bank is “determined” to do what is necessary to deal with inflation, raising the message that stifling price pressures are the number one priority even at the expense of slower growth. and more unemployment.
“The worst mistake we can make would be to fail, which is not an option,” he said. “We need to restore price stability… It’s the foundation of the economy.”
Economists, in turn, have become much more pessimistic about the economic outlook, and several Wednesdays predicted a recession that could begin next year.
“The odds of a soft landing are pretty close to zero, and the reason is that we’re in an unprecedented environment and the Fed’s overwhelming priority is inflation, inflation, inflation,” said Stephen Kane, co-director of ‘fixed income investments. and TCW.
“Inflation is a delayed indicator [and] the fact that they are looking for a lagging indicator to guide what to do for the current monetary policy, which is running for 12 to 18 months, is almost a guarantee that they will over-adjust and cause a recession. “
Economic projections released by the Fed on Wednesday conveyed what Michael Feroli, JPMorgan’s chief U.S. economist, described as “impeccable deflation,” meaning that interest rates could rise enough to control inflation. without stifling economic growth and causing painful job losses.
Fed officials noted that core inflation fell 1.60 percentage points between this year and the next 2.7%, with the unemployment rate rising from the current 3.6% to 3.9% in 2023 and 4.1% in 2024. Most Fed officials now predict slower growth. compared to three months ago, although the economy is still expected to grow 1.7% this year and next.
Powell said Wednesday that these projections were aligned with a “soft” landing for the economy, though he admitted that the path to do so had become “more challenging.”
“What is becoming increasingly clear is that many factors that we do not control will play a very important role in deciding whether this is possible or not,” he said, referring to rising commodity prices. derived from the war in Ukraine and the prolonged supply. chain disruptions that have exacerbated already high inflation.
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With no significant improvement on these fronts, Michelle Meyer, chief economist of the United States of Mastercard, warned that many of the gains of the historically robust U.S. economy and the hot labor market could begin to erode.
“They need to start seeing results in terms of moderating inflation, and if it goes in the other direction and inflation continues to accelerate, then the Fed is in a more complicated position,” he said. “They will have to walk even faster and that could do more damage to the real economy.”
Powell said the Fed should see “compelling evidence” that inflation was falling, specifically a series of monthly reports showing that price pressures are steadily declining, before it is ready to pull back.
The problem with this, according to Tom Porcelli, chief US economist at RBC Capital Markets, is that future inflation impressions could be even worse than the May readings that prompted the Fed to rapidly pick up the pace. hardening.
“Where do you think the main prices will go in the next two months? They’re just going higher,” he said. “If this meeting came up with a 75 basis point increase and you had an inflation rate of 8.6%, and now it will accelerate beyond where we were to 9%, what do you think will happen in July?”
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Porcelli said the momentum could take root by the end of the summer, which means even more pressure for the Fed to act aggressively until September as soon as possible.
Although Powell indicated that the Federal Open Market Committee would likely choose between a 0.5 percentage point increase and a 0.75 percentage point increase at its July meeting, Julia Coronado, a former Fed economist now at MacroPolicy Perspectives, he said the Fed is more likely to push the size of its increases, even to a full percentage point, than was moderate.
“There is a risk that they will walk even further than they say [dot plot]”Considering what Powell said and how happy they are,” he said.
Additional report by Eric Platt in New York