But the aggressiveness of the monetary policy action now underway also pushes central banks into new and risky territory. By tightening quickly and simultaneously when growth in China and Europe is already slowing and supply chain pressures are easing, global central banks risk overdoing it, some economists warn. They may plunge economies into recessions that are deeper than necessary to curb inflation, sending unemployment significantly higher.

“The margin of error now is very thin,” said Robin Brooks, chief economist at the Institute of International Finance. “A lot of this comes down to judgment, and how much emphasis to put on the 1970s scenario.”

In the 1970s, Fed policymakers did lift interest rates in a bid to control inflation, but they backed off when the economy began to slow. That allowed inflation to remain elevated for years, and when oil prices spiked in 1979, it reached untenable levels. The Fed, under Paul A. Volcker, ultimately raised rates to nearly 20 percent — and sent unemployment soaring to more than 10 percent — in an effort to wrestle the price increases down.

That example weighs heavily on policymakers’ minds today.

“We think that a failure to restore price stability would mean far greater pain later on,” Mr. Powell said at his news conference on Wednesday, after the Fed raised rates three-quarters of a percentage point for a third straight time. The Fed expects to raise borrowing costs to 4.4 percent next year in the fastest tightening campaign since the 1980s.

The Bank of England raised interest rates half a point to 2.25 percent on Thursday, even as it said the United Kingdom might already be in a recession. The European Central Bank is similarly expected to continue raising rates at its meeting in October to combat high inflation, even as Russia’s war in Ukraine throws Europe’s economy into turmoil.

Article source: https://www.nytimes.com/2022/09/22/business/economy/central-banks-inflation.html

In the 1970s, the Fed’s attempts at rate increases did not go far enough and were “insufficient to bring inflation down,” said William English, a former director of the monetary affairs division at the Fed who is now an economist at Yale University.

“That’s what they want to avoid,” he said. “In the end, higher inflation isn’t acceptable — you are going to have to bring it down.”

But to lower growth enough to tame price increases, officials think that rates will need to climb notably. Their 2022 forecasts imply that rates could rise by three-quarters of a point at the next meeting, then half a point at the Fed’s December gathering. That is higher than many on Wall Street had been expecting before the meeting, and far more action than what markets had bet on as recently as a few weeks ago.

And policymakers plan to keep going. Central bankers now expect to lift borrowing costs to 4.6 percent by the end of 2023, their fresh projections showed, up from an estimate of 3.8 percent in June. Fed officials do expect to begin lowering rates in 2024, but they anticipate bringing them down slowly.

Given that central bankers are gearing up to push rates to levels not seen since before the 2008 financial crisis, Ms. Misra said she was surprised to see that they did not project an even higher unemployment rate.

Joblessness that climbs to 4.4 percent, as central bankers projected, would undeniably be painful. Omair Sharif, founder of Inflation Insights, calculated that it would amount to about 1.2 million more unemployed people. But it would be relatively mild given the scope of the tightening the central bank is projecting. In the 2008 recession, unemployment rose to 10 percent.

Article source: https://www.nytimes.com/2022/09/21/business/economy/fed-rates-inflation-powell.html

The auto market split into two segments that are now diverging — new cars and used cars.

New-car production was upended as the pandemic shut down factories making semiconductors and other parts, and it is only limping back. Freshly minted vehicles remain extraordinarily scarce, according to dealers and data, and several industry experts said they didn’t see a return to normal levels of output for years as supply problems continue. Prices are still increasing swiftly, and dealer profits remain sharply elevated with little sign of cracking.

Ford Motor said on Monday that it would spend $1 billion more on parts than it was planning to in the third quarter because some components had become more expensive and harder to find.

By contrast, the supply of used cars has rebounded after plunging in the pandemic, and prices have begun to depreciate at a wholesale level, where dealers buy their stock. But, so far, those dealers aren’t really passing those savings along to consumers. The price of a typical used car has stabilized around $28,000, up 9 percent from a year ago, based on Cox Automotive data. Official used-car inflation data is easing, but only slightly.

Why consumer used-car prices — and dealer profits — are taking time to moderate is something of a mystery. Jonathan Smoke, chief economist at Cox Automotive, said dealers might be basing their prices on what they paid earlier in the year, when costs were higher, for the cars sitting on their lots.

“Dealers are feeling it,” Mr. Smoke said of the price moderation. “But because they price their vehicles based on what they pay for them, the consumer isn’t seeing the price discounts yet.”

Some early instances of discounting are showing up. At the Buick and GMC dealership that Beth Weaver runs in Erie, Pa., demand for used cars has begun to slow down, and the business has sold a few vehicles at a loss.

Article source: https://www.nytimes.com/2022/09/21/business/economy/inflation-car-market.html

In the Fed’s last set of projections, officials saw unemployment rising to 4.1 percent in 2024. (September is the first set of projections that will include 2025.) That was above the current 3.7 percent unemployment rate and higher than the 4 percent unemployment rate the Fed saw as sustainable over the longer run.

“These are the unfortunate costs of reducing inflation,” Mr. Powell said late last month. “But a failure to restore price stability would mean far greater pain.”

Watch the growth outlook

The road toward higher unemployment is paved with slower growth. To force the job market to cool and inflation to moderate, Fed officials believe they have to drag economic growth below its potential level — and how much it is expected to drop can send a signal about how punishing the Fed thinks its policies will be.

Many experts think that the economy is capable of a certain level of growth in any given year, based on fundamental characteristics like the age of its population and productivity of its companies. Right now, the Fed estimates that longer-run sustainable level as about 1.8 percent, after adjusting for inflation.

Last year, the economy was growing much more strongly than that — it began overheating. Now, to bring inflation down, it needs to slow below that rate for some time, the logic goes. As of their latest projections, officials saw growth at 1.7 percent this year and next. If they show a bigger down-drift this time, it will be a signal that they think a more aggressive hit to the economy will be needed to wrestle inflation lower.

Pro tip: Ignore the inflation estimates

The inflation estimates in the Fed’s projections typically do not offer a lot of insight.

That’s because the Fed’s forecasts predict how the economy will shape up if central bankers set what they consider to be “appropriate” monetary policy. To qualify as “appropriate,” monetary policy by definition must push price increases back toward the Fed’s 2 percent annual average goal over the course of a few years. That means Fed inflation forecasts always converge back toward the central bank’s goal in economic estimates.

If there is a glimmer of utility here, it is how long the central bank sees it taking to wrestle prices back to its target level. In June, for instance, officials didn’t see it happening through 2024, signaling that the path toward more subdued inflation is likely to be a long one.

Article source: https://www.nytimes.com/2022/09/21/business/economy/how-to-interpret-fed-projections.html

If the Fed continues raising rates along the trajectory that economists and investors increasingly expect, the fallout could be painful. In the early 1980s, the last time inflation was as high as it is today, the central bank under Paul A. Volcker jerked borrowing costs sharply higher and mired the economy in a recession that sent joblessness to double-digit levels. Homebuilders mailed Mr. Volcker two-by-fours from buildings they could not build; car dealers sent keys from cars they could not sell.

This year’s rate increases are not as severe. The Fed has raised rates from near zero in March to a range of 2.25 to 2.5 percent, and this week’s expected move would take that to 3 to 3.25 percent. If the central bank raises rates as much as investors expect over the coming months, they will end the year well above 4 percent. In the 1980s, rates jumped to about 19 percent from 9 percent.

Still, four full percentage points of rate increases in 10 months would be the fastest policy adjustment since Mr. Volcker’s campaign — and while Fed policymakers have been hoping that they can let the economy down gently and without causing a painful recession, economists have warned that a benign outcome is less and less likely.

That central bank has emphasized that it has an obligation to get inflation back in check.

The Fed has two economic goals: maximum employment and stable inflation around 2 percent. While unemployment is currently very low, prices are increasing at more than three times the target rate based on the Fed’s preferred measure and remained stubbornly rapid and broad in August.

As inflation has lingered month after month, the Fed has repeatedly ramped up its response. It lifted rates a quarter point in March, a half point in May and three-quarters of a point at each of its past two meetings. Like investors, many economists think that a full percentage-point move is possible but not likely this week.

A big reason for raising rates quickly is to convince businesses and consumers that the central bank is committed to reining in rapid price increases. If workers begin to believe that inflation will last, they may push for higher wages to cover their costs, which employers then pass onto customers in the form of higher prices, setting off an upward spiral.

Article source: https://www.nytimes.com/2022/09/20/business/economy/federal-reserve-preview-forecasts.html