The Federal Reserve raised a key interest rate by three-quarters of a percentage point again on Wednesday, forecasting more than 1 million lost jobs by next year and a deeper economic slowdown, as the central bank tries to reduce inflation that is running near historic highs.
Fed Chairman Jerome Powell also signaled that more significant rate increases are likely, climbing another full percentage point higher by the end of the year.
“My colleagues and I are acutely aware that high inflation imposes significant hardships as it erodes purchasing power,” Mr. Powell said at a press conference. “Inflation has not really come down.”
It was the third straight three-quarter-point hike by the Fed, moving its benchmark interest rate to a range of 3% to 3.25%, the highest level since 2008. The central bank projected the benchmark rate to reach 4.4% by the end of the year.
The Fed took the latest action — the first time it has raised rates by three-quarters of a point three consecutive times since at least 1991— after inflation in August ticked up to 8.3%, near a 40-year high, despite gasoline prices dropping from record highs this summer. In June, inflation peaked at an annual rate of 9.1%.
The central bank announced its latest rate hike just days after President Biden downplayed the impact of inflation in a nationally televised interview.
“For the last several months, it hasn’t spiked, it is just barely, it’s been basically even,” Mr. Biden said on “60 Minutes.”
Raising interest rates results in higher rates for consumer and business loans. That forces employers to cut back on spending and hiring and slows the economy. Total economic output contracted slightly in the first two quarters of this year.
The Fed’s updated economic projections show the U.S. unemployment rate increasing from the current 3.7% to 4.4% next year. That translates into roughly 1.3 million job losses, a level that Mr. Powell called “relatively modest.”
“Higher interest rates, slower growth and a softening labor market are all painful for the public that we serve,” Mr. Powell said. “But they’re not as painful as failing to restore price stability. We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t. We need to complete this task. People are seeing their wage increases eaten up by inflation. We have to get supply and demand back into alignment. The way we do that is by slowing the economy.”
Some Democrats, whom Republicans blame for high inflation, expressed consternation about looming job losses.
“I’ve been warning that Chair Powell’s Fed would throw millions of Americans out of work — and I fear he’s already on the path to doing so,” tweeted Sen. Elizabeth Warren, Massachusetts Democrat. She lamented “another extreme interest rate hike” by the Fed.
The Fed projected economic growth of 0.2% this year, down from its June forecast of 1.7% growth, and for growth of 1.2% in 2023, down from its earlier forecast of 1.7%.
Stocks, which had been trading higher Wednesday, turned negative after the Fed’s announcement. The Dow Jones Industrial Average lost 522 points for the day, or 1.7%, to close at 30,183.
The S&P Index had fallen 19% this year even before the Fed’s action. The index lost another 1.7% Wednesday.
Along with the Fed’s rate hikes, home mortgage rates have nearly doubled from one year ago to more than 6%, prompting a significant slowdown in the housing market.
Republicans and some economists blame the high inflation on Democrats’ multitrillion-dollar spending bills on COVID-19 relief and other economic measures since Mr. Biden took office.
Steve Hanke, an economist at Johns Hopkins University, said mortgage rates have hit their highest level since November 2008 and that the monthly payment on a median-priced home is up nearly 66% from a year ago.
“Who is to blame? Biden’s wild spending & the Fed’s money printing press,” he tweeted.
Some credit card borrowing rates have risen to as high as 20%. Even before the Fed’s action Wednesday, credit card rates had reached the highest level since 1996, and credit card balances are rising.
The Fed is trying to reduce inflation nearer to its target goal of 2% annually. But the consumer price index, a measure of the price for everyday goods such as gasoline, groceries and rent, increased 0.1% in August from the previous month despite expectations that prices would fall.
Mr. Powell didn’t offer a prediction of how quickly he expects inflation to drop. He said the Fed is trying to exert “meaningful downward pressure” on prices and that officials are looking for “clear evidence” that their actions are working.
“No one knows whether this process will lead to a recession,” he said.
The quarterly MetLife and U.S. Chamber of Commerce Small Business Index, released Wednesday, found that concern for inflation among small-business owners had reached a new high. It said 90% of small businesses are concerned about the impact of inflation, with 54% saying they are very concerned, up from 31% in the first quarter of the year.
Half of small businesses said inflation is the biggest challenge facing small business currently, the fifth consecutive quarter of increasing worry about inflation.
“Inflation is really hitting small business hard, and that reality is negatively impacting their confidence, their ability to hire, invest in their businesses, and grow,” said Tom Sullivan, vice president of small business policy at the Chamber.
• Dave Boyer can be reached at dboyer@washingtontimes.com.
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