Ahead of a critical inflation reading, the Federal Reserve on Wednesday indicated it would continue an aggressive interest rate hiking campaign until there was more clear evidence that inflation has come down significantly—though it also acknowledged the uphill battle policymakers are facing to fight spiking prices without plunging the world into a recession.
In a summary of the Fed’s late-September meeting, officials acknowledged inflation, which has fallen more slowly than previously expected, remains “unacceptably high” and said tempering the surge would require a period of softer economic growth “very likely” accompanied by a weakening labor market.
They also defended their aggressive policy moves, saying additional hikes would help prevent the “far greater economic pain” associated with high inflation and adding that the cost of taking too little action “likely” outweighs the cost of taking too much.
The release comes after the producer price index, a forward-looking indicator that measures inflation among producers, came in hotter than expected and climbed for the first time in three months, effectively supporting another hefty 75-basis-point hike to an upper level of 3.25% at the Fed’s next meeting in November, according to Comerica Bank chief economist Bill Adams.
“This interest rate is not high by historical standards, but the world changes,” Adams says, noting that debt levels across the economy are much higher than they’ve ever been and that interest rate increases will slow the economy “much more than they used to” as a result.
Skyrocketing prices have forced central banks around the world to reverse pandemic-era policy measures meant to bolster markets—but stubborn inflation has economists worrying officials may fuel a recession while trying to cool the economy. Already, the Fed’s rate hikes have seriously rattled the housing and stock markets. New home sales plunged to a six-year low this summer, and the S&P 500 has shed about 25% of its value this year—reversing nearly two years of gains. Analysts warn the fallout will only get worse if the nation plunges into a recession.
What To Watch For
Consumer price index data is slated for release Thursday morning, and the Fed’s next two-day policy meeting concludes on November 2, when officials are expected to announce how big the next interest rate hike will be. Comerica forecasts the Fed will authorize another 75-basis-point hike in November, followed by a half-point in December and a quarter-point in February—putting the Fed funds target at a “very restrictive” range of 4.5% to 4.75%.
As interest rate hikes threaten a global recession, critics have started calling for central banks to reverse their aggressive policy. “The world is headed toward a global recession and prolonged stagnation unless we quickly change the current policy course of monetary and fiscal tightening in advanced economies,” the United Nations warned in a report last week, adding that “alarm bells are ringing most” for developing countries loaded with debt and edging closer to a potential default.
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