© Reuters. The exterior of the Marriner S. Eccles Federal Reserve Board Building is seen in Washington, DC, U.S., June 14, 2022. REUTERS / Sarah Silbiger
By Lindsay (NYSE:) Dunsmuir and Ann Saphir
(Reuters) – The Federal Reserve on Wednesday made its third consecutive 75-basis-point interest rate hike in its campaign to push borrowing costs high enough to reduce 40-year high inflation.
The goal: to get businesses and households to reduce spending and reduce demand for goods, services, and labor, thereby easing upward price pressures.
But the process will not go smoothly. Ordinary Americans have felt the sting of inflation for months, and the Fed’s efforts to bring it down so far have made it harder for many consumers to buy things like a home or a car. However, other types of shoes have not yet declined, such as a skyrocketing unemployment rate or even a recession.
Here’s how it could go:
RISK EXPANDING, INFLATION STILL HIGH
Fed Chairman Jerome Powell has said that the swift and aggressive action the central bank is taking will have “unfortunate costs” including an increase in the unemployment rate, currently at a very low 3.7% . Fed policymakers expect it to rise to 4.4% by the end of next year, forecasts released Wednesday show.
Earlier this month, Fed Governor Chris Waller warned the Fed would be comfortable with a 5% rise in unemployment before policymakers begin to consider any changes in strategy. The magnitude of the increase – which could lead to more than 2 million jobs lost – has historically been consistent with a slowing economy. In terms of perspective: in the last three recessions, the unemployment rate peaked at 14.7%, 9.5% and 5.5% in 2020, 2009 and 2001 respectively.
However, none of those recessions preceded inflation anywhere near as high as it is today, a fact that could make an upcoming recession all the more painful.
Wages slow to grow, JOB OPEN MORE
Wages rose at an annual rate of 5.2% in August, a strong increase, with the lowest-paid workers seeing the biggest increases in their pay packages. But that’s where the good news ends. Policymakers think the pace of wage growth is too strong to match the Fed bringing overall inflation back to its 2% target, so they are trying to bring it down. They worry that the longer those excess wage hikes drag on, the more likely that high inflation will plunge the economy into a self-perpetuating spiral.
One reason wages have risen so sharply is fierce demand for a pool of workers that has only just regained its pre-pandemic scale, even as the economy has gotten bigger. The availability of nearly two job openings for every jobseeker reflects that, and Fed policymakers expect businesses to respond to the rate hike primarily by cutting hiring. instead of being laid off completely. Fewer jobs will lead to slower wage growth, which means that unless inflation falls quickly, many workers will find their pay package actually shrinking after accounting for the impact from inflation.
Fed policymakers expect inflation, currently at 6.3% by their preferred measure, to fall to 2.8% by the end of next year, projections released on Wednesday for see.
SAVE RATE WILL INCREASE BUT THE PRICE OF CONSUMER LOANS WILL GROW
Households will see an increase in the interest rate on their savings accounts, especially at online institutions. But in general, banks are slow to pass on the Fed’s rate hikes to savers, and to do so at a rate often far below the central bank’s policy rate and, now, inflation.
Finance companies will also raise interest rates on most consumer and auto loans, rates that have often been much higher than the central bank benchmark since the beginning.
BUY HOME AS Least Possible, BUT RENTAL KEEP RISK
Of all the sectors of the economy, the housing market has been where the Fed raised rates the most and fastest, with mortgage rates doubling in just over eight months to a current average of 6.25 % on a 30-year fixed-rate mortgage. Home sales have fallen. However, in part because the housing shortage remains severe, prices fell only slightly, to $389,500 for the median existing home in August – still up 7.7% from just a year earlier. With the rise in rates, monthly mortgage payments on a median-priced existing home have increased by nearly 60% to $1,940 this year. Economists at Oxford Economics estimate about 17 million lower-income households qualify for a mortgage on a median-priced home than at the end of last year.
Rising rents are also hurting earnings, at least for the next few months. The weighted average growth rate of the two main rent indexes increased to 6.4% in August from a year ago, while the 3-month annualized rate increased to 8.6%.” shows that rents are still in the process of moving higher,” said Ryan Wang, US economist at HSBC.
FOOD AND GAS PRICES: NOT HOW MUCH THE FED CAN DO
As the Fed raises interest rates to quell inflation, the everyday prices that Americans are perhaps most interested in — food and gas — are beyond the reach of the central bank, as their costs are determined by Global factors largely affect supply. Gasoline prices in the US, which spiked to more than $5 per gallon in mid-June due to the impact of Russia’s invasion of Ukraine, have fallen to around $3.70 per gallon, the 11th straight week of declines. Wholesale gasoline prices are expected to continue falling in the coming months as US refineries produce too much fuel to try to rebuild low inventories of diesel and according to analysts and traders. core.
But the ongoing war in Ukraine, as well as severe droughts in Europe and China, will cause US food prices, which have risen more than 11% from a year ago, to rise at least early next year. Russia’s announcement earlier on Wednesday that it would send significant additional troops to Ukraine further escalates the conflict and could jeopardize the Black Sea corridor established under a recent UN-backed deal. This allows the export of marine grain from Ukraine.