The Federal Reserve’s next big rate hike could be its last

(The Hill) – The Federal Reserve is on track to issue another massive rate hike on Wednesday before slowing down the pace of its battle to fight inflation.

Analysts and economists believe the Fed will raise its benchmark interest rate range by another 0.75 percentage points at the end of Wednesday’s meeting. The Fed’s move would mark the fourth consecutive rate increase of the measure considered “extraordinarily large.”

It could also mark a turning point as the Fed faces mounting pressure to take its foot off the economic brake.

Fed Chairman Jerome Powell is not expected to announce a pause to rate hikes or the bank’s intentions for its final policy meeting in December. But Fed watchers will pay close attention to signs that Fed officials believe they may be close to the level they plan to set interest rates for the foreseeable future.

“We see a decent chance that core inflation and wage growth will slow at the same time, more or less, making it more likely that the Fed’s final hike will be in December,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a research note Monday. .

The Fed’s rate hikes have led to sharp declines house sales and the first steady price declines in more than a decade as buyers balk at rising mortgage rates. Wage growth has calmed down as businesses curb their hiring ambitions, and firms have pulled back in long-term investments that can drive future growth.

“We see enough straws in the wind now to think that the economy is at a real inflexion point,” wrote Shepherdson.

However, inflation has remained stubbornly high, and Powell has warned that the bank will keep up the pressure until price growth shows clear signs of falling.

“This strength has not been fully reflected in the hard data that matters most to the market and the Fed,” Shepherdson said.

Prices rose 6.2 percent over the past year, as measured by the personal consumption expenditures price index, the Fed’s preferred measure of inflation. It remains well above the Fed’s target for 2 percent annual inflation.

The consumer price index (CPI), another key gauge of inflation, was up 8.2 percent on the year in September. While the CPI is not the Fed’s primary inflation gauge, banks still pay close attention to it.

“Although the headline Consumer Price Index (CPI) has fallen from the 40-year record of 9.1% set in June to 8.2% in September, it is still very high,” wrote Dan North, senior economist at Allianz Trade, in a research note Monday. .

“The super aggressive path of the Fed is justified since the inflation, which is caused, has not been killed. But by that time, the Fed will lead the economy into recession,” he said.

The Fed has faced a difficult balance since it first raised interest rates in March: raise interest rates slowly and risk losing the ability to control inflation or raise them too quickly at the risk of bringing the economy to a standstill.

Fed officials have decisively chosen the latter, insisting a recession caused by high interest rates will be less damaging than one caused by their refusal to bring inflation down.

“We think that failure to restore price stability will mean much greater pain later on,” Powell said after the Fed raised rates in September.

“Records show that if you delay, that delay is only likely to cause more pain,” he continued, referring to the grueling recession the Fed triggered to bring inflation down from much higher levels during the 1980s.

The bank is also facing more pressure to prove it can curb inflation after refusing to raise rates in 2021 while rates are rising fast, insisting it will drop again soon.

“Commitment to a premature slowdown without seeing any significant improvement in inflation could pose another challenge to the Fed’s credibility if inflation surprises to the upside and [Fed officials] forced to withdraw,” economists at investment bank Nomura wrote in a research note Monday.

“We believe the Fed will want clear and compelling evidence that inflation has indeed made progress before they commit to slowing the rate of rate hikes,” they added.

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