September 30, 2022

The Fed Intensifies Its Battle Against Inflation

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:

Speak Your Mind