Fed will decide ‘meeting by meeting’ on rate hikes

WASHINGTON (AP) — Federal Reserve Chair Jerome Powell on Wednesday underlined the Fed’s determination to raise interest rates high enough to slow inflation, a pledge that has fueled concerns that the central bank’s struggle against rising prices could send the economy into recession.

Powell said the pace of future rate hikes will depend on whether — and how quickly — inflation begins to decline, something the Fed will assess “meeting by meeting.”

Decision-making will be based on “the incoming data and the evolving outlook for the economy,” Powell said in prepared testimony to the Senate Banking Committee, which he addresses as part of the Fed’s semi-annual policy report to Congress.

Powell’s testimony comes a week after the Fed raised its benchmark rate by three-quarters of a percentage point, its biggest increase in almost three decades, to a range of 1.5% to 1.75%. With inflation worsening, Fed policymakers are also forecasting an accelerated pace of rate hikes this year and next than they forecast three months ago, with a key rate of 3.8% by the end of 2023. That would be the highest level in 15 years. to be .

Concerns are growing that with inflation hitting four decades, the Fed will tighten lending so much as to trigger a recession. This week, Goldman Sachs estimated the probability of a recession at 30% for the coming year and 48% for the next two years.

A high-ranking Republican on the Banking Committee, Senator Thom Tillis of North Carolina, accused Powell on Wednesday of taking too long to raise interest rates. †

“The Fed has largely framed itself in a menu of purely reactive policy measures,” Tillis said.

At a news conference last week, Powell suggested that a half- or three-quarters point rate hike would be considered at the Fed’s next meeting in late July. Both would exceed the Fed’s past increases by a quarter, reflecting the central bank’s struggle to contain high inflation as quickly as possible.

In anticipation of further large interest rate hikes, investors have pushed government bond yields sharply higher, which has made borrowing costs for home purchases more expensive. With the average 30-year fixed mortgage rate down to about 5.8% – almost twice as high as a year ago – home sales have declined. Credit card users and cars also face higher borrowing costs.

Fed officials hope such changes will help meet their goals of cooling demand enough to slow the economy and moderate price increases. In his testimony, Powell said higher interest rates “should continue to dampen growth and help better balance demand with supply.”

The aggressive pace of Fed rate hikes has fueled fears that it will curb lending to businesses and consumers too much. But in forecasts released last week, Fed officials predict that while the economy will slow sharply this year and next, it will continue to grow. However, they also predicted that unemployment will rise by half a percentage point by 2024, an increase that economists say could lead to a recession.

Powell reiterated his position on Wednesday that the US economy is “very strong and well positioned” to withstand higher interest rates. But with inflation wreaking havoc on millions of US households, he has emphasized that moderating price spikes through rate hikes is the Fed’s top priority.

On Wednesday, the Fed chairman said central bank policymakers will “look for compelling evidence in the coming months that inflation is falling” before slowing down their pace of rate hikes. In a policy report to Congress submitted late last week, the Fed said its commitment to fighting inflation is “unconditional.”

For now, most analysts expect a second three-quarter-point rate hike by the end of next month and at least a half-point rate hike when the Fed meets again in September.

Even as borrowing costs rise and economic growth slows, inflation is expected to remain well above the Fed’s annual target of 2% by the end of this year. Loretta Mester, president of the Federal Reserve Bank of Cleveland, predicted on Sunday that bringing inflation down to 2% “will take a few years.”

A combination of slow growth, a possible recession and still high inflation would put the Fed in a difficult position: further rate hikes would likely weaken the economy further and push unemployment up. Still, suspending further rate hikes could send inflation racing to painfully high levels and hurt the economy.

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