Countries that have raised their policy interest rate this year Arrow lengths are each country’s most recent increase in percentage points. Saudi Arabia The Eurozone rate will increase by 0.25 in July. Countries that have raised their policy interest rate this year Eurozone rate will increase by 0.25 in July. United States South Korea Saudi […] More
The Federal Reserve took its most aggressive step yet to try to tame rapid and persistent inflation, raising interest rates by three-quarters of a percentage point on Wednesday and signaling that it is prepared to inflict economic pain to get prices under control.The rate increase was the central bank’s biggest since 1994 and could be followed by a similarly sized move next month, suggested Jerome H. Powell, the Fed chair, underscoring just how much America’s unexpectedly stubborn price gains are unsettling Fed officials.As central bankers drive their policy rate rapidly higher, it will make buying a home or expanding a business more expensive, restraining spending and slowing the broader economy. Officials expect growth to moderate in the coming months and years and predicted that unemployment will rise about half a percentage point to 4.1 percent by late 2024 as their policy squeezes companies and workers.Mr. Powell acknowledged that it was becoming increasingly difficult for the Fed to slow inflation without causing a recession as outside forces, including the war in Ukraine and factory shutdowns in China, threaten to curb the supply of goods and commodities like oil. If the Fed has to quash demand to an extreme degree in an effort to bring it into line with limited supply, it could make for a slump that leaves businesses shuttered and people unemployed.“We’re not trying to induce a recession right now, let’s be clear about that,” Mr. Powell said, explaining that the Fed still wants to reduce inflation to its 2 percent goal while keeping the labor market strong — an outcome economists call a “soft landing.”But “those pathways have become much more challenging due to factors that are outside of our control,” he said, later adding that “the environment has become more difficult, clearly, in the last four or five months.”The latest move set the Fed’s policy rate in a range of 1.50 percent to 1.75 percent, and more rate increases are to come. Mr. Powell signaled that the debate at the Federal Open Market Committee’s next meeting in July will be over whether to raise rates half a point or to repeat an increase of three-quarters of a point, though he added that he did “not expect moves of this size to be common.”Officials expect interest rates to hit 3.4 percent by the end of 2022, according to economic projections they released Wednesday, which would be the highest level since 2008. They also foresee the Fed’s policy rate peaking at 3.8 percent at the end of 2023, up from 2.8 percent when projections were last released in March.As rates rise, policymakers anticipate that growth will slow and joblessness will climb slightly, starting this year.“What Powell and the rest of the F.O.M.C. are saying is that restoring price stability is the primary focus — if they risk a mild recession, or a bumpy soft landing, that would still be successful,” said Kathy Bostjancic, chief U.S. economist at Oxford Economics. “The focus is greatly on inflation right now.”Until late last week, investors and many economists expected the central bank to raise interest rates just half a percentage point at this week’s meeting. The Fed had lifted rates by a quarter point in March and half a point in May, and had signaled that it expected to continue that pace in June and July.But central bankers have received a spate of bad news on inflation in recent days. The Consumer Price Index jumped 8.6 percent in May from a year earlier, the fastest increase since late 1981. The pace was brisk even after the stripping out of food and fuel prices.While the Fed’s preferred price gauge — the Personal Consumption Expenditures measure — is climbing slightly more slowly, it remains too hot for comfort as well. And consumers are beginning to expect faster inflation in the months and years ahead, based on surveys, which is a worrying development. Economists think that expectations can be self-fulfilling, causing people to ask for wage increases and accept price jumps in ways that perpetuate high inflation.“What we’re looking for is compelling evidence that inflationary pressures are abating, and that inflation is moving back down,” Mr. Powell said at his news conference Wednesday, noting that instead the inflation situation has worsened. “We thought that strong action was warranted.”One Fed official, the president of the Federal Reserve Bank of Kansas City, Esther George, voted against the rate increase. Though Ms. George has historically worried about high inflation and favored higher interest rates, she would have preferred a half-point move in this instance.Some analysts found the Fed’s economic projections and Mr. Powell’s view that a soft landing may still be possible to be optimistic in light of the more aggressive policy path the central bank has charted. Economists at Wells Fargo announced after the Fed meeting that they expected a downturn to start midway through next year.“The Fed is becoming a bit more realistic about how difficult it is going to be to lower inflation without inflicting damage on the labor market,” said Sarah House, a senior economist at Wells Fargo. “There is that growing acknowledgment that a soft landing is increasingly difficult — I still think they’re painting a fairly rosy picture.”Stock prices have been plummeting and bond market signals are flashing red as Wall Street traders and economists increasingly expect that the economy may tip into a recession. On Wednesday, the S&P 500 rose 1.5 percent, climbing after the release of the decision and Mr. Powell’s news conference, most likely because investors had already expected the Fed to make a large move.The economy remains strong for now, but the Fed’s actions are beginning to have a real-world impact: Mortgage rates have risen sharply and are helping to cool the housing market; demand for consumer goods is showing signs of beginning to slow as borrowing becomes more expensive; and job growth, while robust, has begun to moderate.While the economic path ahead may be a rocky one, the Fed’s policymakers contend that things would be worse in the long run if they did not act. As prices surge, worker pay is not keeping up. That means that families are falling behind as they try to afford gas, food and rent, even in a very strong labor market.“You really cannot have the kind of labor market we want without price stability,” Mr. Powell said Wednesday, explaining that what officials want is a job market with lots of job opportunities and rising wages. “It’s not going to happen with the levels of inflation we have.”The White House has been emphasizing that the Fed plays the key role in bringing down inflation, even as the Biden administration does what it can to reduce some costs for beleaguered consumers and urges companies to improve gas supply.“The Federal Reserve has a primary responsibility to control inflation,” President Biden wrote in a recent opinion column. He added that “past presidents have sought to influence its decisions inappropriately during periods of elevated inflation. I won’t do this.” More
What does the Fed’s decision to raise its key interest rate by three-quarters of a percentage point mean for mortgages? [Here’s what the Fed’s decision means for credit cards, car loans and student loans.]Rates on 30-year fixed mortgages don’t move in tandem with the Fed’s benchmark rate, but instead track the yield on 10-year Treasury bonds, which are influenced by a variety of factors, including expectations around inflation, the Fed’s actions and how investors react to all of it.“We are seeing rates move up pretty briskly and a lot of that has to do with forward-looking expectations with where things are headed,” said Len Kiefer, deputy chief economist at Freddie Mac. “Maybe inflation will be stickier than the market thought.”Mortgage rates have jumped by two percentage points since the start of 2022, though they’ve held somewhat steady in recent months. But with consumer prices still surging, mortgage rates are on the rise once again — by some estimates, reaching as high as 6 percent.The closely watched rate averages from Freddie Mac won’t be released until Thursday, but they already began to tick a bit higher last week: Rates on 30-year fixed rate mortgages were 5.23 percent as of June 9, according to Freddie Mac’s primary mortgage survey, up from 5.09 percent the week before and 2.96 percent the same week in 2021.Other home loans are more closely tethered to the Fed’s move. Home equity lines of credit and adjustable-rate mortgages — which each carry variable interest rates — generally rise within two billing cycles after a change in the federal funds rates. More
The Fed’s decision to raise its key interest rate by three-quarters of a percentage point is good news for savers, but less so for borrowers: They can expect to pay more on credit card debt, car loans and certain student loans. [Here’s what the Fed’s decision means for mortgages.]Credit CardsCredit card rates are closely linked to the Fed’s actions, so consumers with revolving debt can expect to see those rates rise, usually within one or two billing cycles. The average credit card rate was recently 16.73 percent, according to Bankrate.com, up from 16.34 percent in March.“With the frequency of Federal Reserve rate hikes this year, it will be a drumbeat of higher rates for cardholders every couple of statement cycles,” said Greg McBride, chief financial analyst at Bankrate.com. “And the cumulative effect is growing. If the Fed raises rates by a total of three percentage points this year, your credit card rate will be three percentage points higher by the first of the year.”Car LoansCar loans are also expected to climb, but those increases continue to be overshadowed by the rising cost of buying a vehicle (and the pain of what you’ll pay at the gas pump). Car loans tend to track the five-year Treasury, which is influenced by the federal funds rate — but that’s not the only factor that determines how much you’ll pay.A borrower’s credit history, the type of vehicle, loan term and down payment are all baked into that rate calculation.The average interest rate on new-car loans was 5.08 percent in May, according to Dealertrack, which provides business software to dealerships. That’s almost a full percentage point higher than December 2021, when rates had reached their lowest point since 2015 and when the firm began tracking rates.The average rate for used vehicles was 8.46 percent in May, also nearly a full percentage point higher than December. But those rates vary widely; borrowers with the lowest credit scores received average rates of 20 percent in May, Dealertrack said, whereas individuals with the most pristine credit histories received rates of 3.92 percent.Student LoansWhether the rate increase will affect your student loan payments depends on the type of loan you have.Current federal student loan borrowers — whose payments are on pause through August — aren’t affected because those loans carry a fixed rate set by the government.But new batches of federal loans are priced each July, based on the 10-year Treasury bond auction in May. Rates on those loans have already jumped: Borrowers with federal undergraduate loans disbursed after July 1 (and before July 1, 2023) will pay 4.99 percent, up from 3.73 percent for loans disbursed the year-earlier period.Private student loan borrowers should also expect to pay more; both fixed and variable-rate loans are linked to benchmarks that track the federal funds rate. Those increases usually show up within a month.But the Fed is not finished and has penciled in rates hitting 3.4 percent by the end of 2022. Private lenders will probably bake those and other expectations into their interest rates as well — meaning borrowers could end up paying anywhere from 1.5 to 1.9 percentage points more, depending on the length of the loan term, explained Mark Kantrowitz, a student loan expert and author of “How to Appeal for More College Financial Aid.” More
The central bank has hoped to cool down the economy without pushing unemployment much higher. Stubborn inflation narrows that path.Federal Reserve officials are meeting this week with one major goal in mind: cooling the economy enough to slow rapid inflation.The odds of pulling that off without plunging the nation into a recession are growing slimmer.As the Fed prepares to take an aggressive stance to tamp down persistent inflation — likely discussing raising interest rates by three-quarters of a point on Wednesday — investors, consumers and economists increasingly expect that the economy could tip into a downturn next year. Even researchers who think the central bank can still pull off a “soft landing,” in which policymakers guide the economy onto a more sustainable path without causing a spike in unemployment and an outright contraction, acknowledge that the path toward that optimistic outcome has become narrower.“It was not obvious that a soft landing was feasible,” said Michael Feroli, chief U.S. economist at J.P. Morgan, who still thinks it could happen. “The degree of difficulty has probably increased.”The trouble stems from America’s inflation data, which have been growing more worrying. Consumer prices accelerated in May to an 8.6 percent pace, the fastest since 1981. Even after volatile food and fuel costs, which the central bank cannot do much to control, are stripped out, inflation was firmer than expected last month as rents, airfares and hotel room rates surged. Compounding the problem, two recent reports showed, inflation expectations are headed higher.The data suggest the Fed may need to act more decisively, slowing consumer and business spending and the job market even more, to bring prices under control.Before last week’s inflation report, central bankers had been expected to raise interest rates by half a percentage point this week and then again in July. But now the Fed is likely to discuss moving more rapidly to try to stamp out inflation pressures before they become a permanent feature of the economic backdrop. It could also continue to raise rates by more than the usual quarter-point increments into September or even beyond, many economists predict.The Fed has already raised rates twice this year, by a quarter point in March and half a point in May. If it takes more drastic action — making mortgages and business loans even more expensive, choking off corporate expansion plans and crimping the labor market — it would make higher unemployment and a shrinking economy more likely.Understand Inflation and How It Impacts YouInflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Greedflation: Some experts contend that big corporations are supercharging inflation by jacking up prices. We take a closer look at the issue. Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.For Investors: At last, interest rates for money market funds have started to rise. But inflation means that in real terms, you’re still losing money.For months, the Fed has acknowledged that the path toward slower inflation was likely to be an unpleasant one. When the central bank raises the federal funds rate, it filters out through the economy to slow consumer and business demand, eventually weighing on wages and prices. The way to bring inflation under control is, essentially, to cause a little economic pain.Still, top policymakers have voiced consistent optimism that because America’s labor market was starting from a solid position, it might be possible to cool down inflation without erasing recent job market progress. With so many job openings per unemployed worker, the logic went, it might be possible to restrain conditions just enough to bring the supply of workers into better balance with employer demands.“I think we have a good chance to have a soft or soft-ish landing,” Jerome H. Powell, the Fed chair, said at his news conference after the central bank’s May meeting. He added that “the economy is strong and is well positioned to handle tighter monetary policy.”Food and fuel costs are very volatile, but the central bank cannot do much to control them. Alisha Jucevic for The New York TimesBut somebody has to feel the pressure and stop spending for the Fed’s policy to work — and with inflation higher and more stubborn, it will take a bigger squeeze on demand to bring it in line.In fact, Mr. Feroli at J.P. Morgan said, the Fed’s economic projections — which will be released for the first time since March after this meeting — could show a marked slowdown in growth and an increase in the jobless rate to illustrate that policymakers are serious about reining in the economy and controlling prices. Joblessness is now at 3.6 percent, which is below the 4 percent level that Fed officials believe a healthy economy can sustain over the longer run.If the Fed has to slow the economy drastically, it will be a challenge to do that without causing a recession. For one thing, when unemployment spikes, recession tends to follow. Downturns have happened when the unemployment rate rose 0.5 percentage points over its recent low on average over a three-month period — a relationship called the Sahm Rule, after economist Claudia Sahm.For another, interest rates are a blunt tool and work with a lag, and the Fed may simply overdo it.Investors fear a bad outcome. Stocks sank into a bear market on Monday — meaning they have quickly dropped in value by 20 percent — as investors become nervous that the central bank is about to spur a recession in its quest to tame inflation.“People think that the soft-ish landing is a dream,” said Priya Misra, head of global rates strategy at TD Securities. “That’s the big picture.”It’s not just Wall Street that is increasingly glum. Consumer confidence fell to its lowest level on record in preliminary data from the University of Michigan survey, and expectations of higher unemployment in a New York Fed survey have been picking up.Inflation F.A.Q.Card 1 of 5What is inflation? More
Inflation is a tricky problem, but it has a few clear causes and consequences, and policymakers are working to bring it to heel.The government reported on Friday that consumer prices climbed 8.6 percent over the year through May, the fastest rate of increase in four decades.Americans are confronting more expensive food, fuel and housing, and some are grasping for answers about what is causing the price burst, how long it might last and what can be done to resolve it.There are few easy answers or painless solutions when it comes to inflation, which has jumped around the world as supply shortages collide with hot consumer demand. It is difficult to predict how long today’s price surge will drag on, and the main tool for fighting it is interest rate increases, which cool inflation by slowing the economy — potentially sharply.Here’s a guide to understanding what’s happening with inflation and how to think about price gains when navigating this complicated moment in the U.S. and world economy.What’s Driving InflationIt can be helpful to think of the causes of today’s inflation as falling into three related buckets.Strong demand. Consumers are spending big. Early in the pandemic, households amassed savings as they were stuck at home, and government support that continued into 2021 helped them put away even more money. Now people are taking jobs and winning wage increases. All of those factors have padded household bank accounts, enabling families to spend on everything from backyard grills and beach vacations to cars and kitchen tables.Too few goods. As families have taken pandemic savings and tried to buy pickup trucks and computer screens, they have run into a problem: There have been too few goods to go around. Factory shutdowns tied to the pandemic, global shipping backlogs and reduced production have snowballed into a parts-and-products shortage. Because demand has outstripped the supply of goods, companies have been able to charge more without losing customers.Now, China’s latest lockdowns are exacerbating supply chain snarls. At the same time, the war in Ukraine is cutting into the world’s supply of food and fuel, pushing overall inflation higher and feeding into the cost of other products and services. Gas prices are averaging around $5 a gallon nationally, up from just over $3 a year ago.Service-sector pressures. More recently, people have been shifting their spending away from things and back toward experiences as they adjust to life with the coronavirus — and inflation has been bubbling up in service industries. Rents are climbing swiftly as Americans compete for a limited supply of apartments, restaurant bills are heading higher as food and labor costs rise, and airline tickets and hotel rooms cost more because people are eager to travel and because fuel and labor are more expensive.You might be wondering: What role does corporate greed play in all this? It is true that companies have been raking in unusually big profits as they raise prices by more than is needed to cover rising costs. But they are able to do that partly because demand is so strong — consumers are spending right through price increases. It is unclear how long that pricing power will last. Some companies, like Target, have already signaled that they will begin to reduce prices on some products as they try to clear out inventory and keep customers coming.Understand Inflation and How It Impacts YouInflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Greedflation: Some experts contend that big corporations are supercharging inflation by jacking up prices. We take a closer look at the issue. Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.Interest Rates: As it seeks to curb inflation, the Federal Reserve began raising interest rates for the first time since 2018. Here is what that means for inflation.How Is Inflation Measured?Economists and policymakers are closely watching America’s two primary inflation gauges: The Consumer Price Index, which was released on Friday, and the Personal Consumption Expenditures index.The C.P.I. captures how much consumers pay for things they buy, and it comes out earlier, making it the nation’s first clear glimpse at what inflation did the month before. Data from the index is also used to come up with the P.C.E. figures.The P.C.E. index, which will be released next on June 30, tracks how much things actually cost. For instance, it counts the price of health care procedures even when the government and insurance help pay for them. It tends to be less volatile, and it is the index the Federal Reserve looks to when it tries to achieve 2 percent inflation on average over time. As of April, the P.C.E. index was climbing 6.3 percent compared with the prior year — more than three times the central bank target.Fed officials are paying close attention to changes in month-to-month inflation to get a sense of its momentum.Policymakers are also particularly attuned to the so-called core inflation measure, which strips out food and fuel prices. While groceries and gas make up a big part of household budgets, they also jump around in price in response to changes in global supply. As a result, they don’t give as clear a read on the underlying inflationary pressures in the economy — the ones the Fed believes it can do something about.“I’m going to be looking to see a consistent string of decelerating monthly prints on core inflation before I’m going to feel more confident that we’re getting to the kind of inflation trajectory that’s going to get us back to our 2 percent goal,” Lael Brainard, the vice chair of the Fed and one of its key public messengers, said during a CNBC interview last week.What Can Slow the Rapid Price Gains?How long prices will continue to climb rapidly is anyone’s guess: Inflation has confounded experts repeatedly since the pandemic took hold in 2020. But based on the drivers behind today’s hot prices, a few outcomes appear likely.For one, quick inflation seems unlikely to go away entirely on its own. Wages are climbing much more rapidly than normal. That means unless companies suddenly get more efficient, they will probably try to continue to increase prices to cover their labor costs.Inflation F.A.Q.Card 1 of 5What is inflation? More
WASHINGTON — At her confirmation hearing in early 2021, Treasury Secretary Janet L. Yellen told lawmakers that it was time to “act big” on a pandemic relief package, playing down concerns about deficits at a time of perpetually low interest rates and warning that inaction could mean widespread economic “scarring.”A year and a half later, prices are soaring and interest rates are marching higher. As a result, Ms. Yellen’s role in crafting and selling the $1.9 trillion American Rescue Plan, which Congress passed in March of last year, is being parsed amid an intensifying blame game to determine who is responsible for the highest rates of inflation in 40 years. After months of pinning rising prices on temporary supply chain problems that would dissipate, Ms. Yellen acknowledged last week that she had gotten it “wrong,” putting the Biden administration on the defensive and thrusting herself into the middle of a political storm.“I think I was wrong then about the path that inflation would take,” Ms. Yellen said in an interview with CNN, adding that the economy had faced unanticipated “shocks” that boosted food and energy prices.Republican lawmakers, who have spent months blaming President Biden and Democrats for rising prices, gleefully seized upon the admission as evidence that the administration had mismanaged the economy and should not be trusted to remain in political control.The Treasury Department has scrambled to clarify Ms. Yellen’s remarks, saying her acknowledgment that she misread inflation simply meant that she could not have foreseen developments such as the war in Ukraine, new variants of the coronavirus or lockdowns in China. After a book excerpt suggested Ms. Yellen favored a stimulus package smaller than the $1.9 trillion that Congress approved last year, the Treasury released a statement denying that she had urged more spending restraint.At this tenuous moment in her tenure, Ms. Yellen is expected to face tough questions on inflation when she testifies before the Senate Finance Committee on Tuesday and the House Ways and Means Committee on Wednesday. The hearings are ostensibly about the president’s budget request for the 2023 fiscal year, but Republicans are blaming Mr. Biden’s policies, including the $1.9 trillion stimulus package, for high prices for consumer products, and Ms. Yellen’s comments have given them grist to cast his first term as a failure.“How can Americans trust the Biden administration when the same people that were so wrong are still in charge?” said Tommy Pigott, rapid response director for the Republican National Committee.Understand Inflation and How It Impacts YouInflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Measuring Inflation: Over the years economists have tweaked one of the government’s standard measures of inflation, the Consumer Price Index. What is behind the changes?Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.Interest Rates: As it seeks to curb inflation, the Federal Reserve began raising interest rates for the first time since 2018. Here is what that means for inflation.The glare is particularly uncomfortable for Ms. Yellen, an economist and former chair of the Federal Reserve, who prides herself on giving straight answers and staying above the political fray.In recent weeks, Ms. Yellen has had to defend the Biden administration’s economic policies even as fault lines have emerged within the economic team. She has expressed reservations about the lack of progress in rolling back some of the Trump administration’s China tariffs, which she views as taxes on consumers that were “not strategic,” and she has been reluctant to support student debt forgiveness proposals, which could further fuel inflation if people have more money to spend.Over the weekend, Ms. Yellen came under fire again after an excerpt from a forthcoming biography of her indicated that she had sought unsuccessfully to pare down the pandemic aid bill because of inflation concerns. The Treasury Department released a rare Saturday statement from Ms. Yellen denying that she argued that the package was too big.“I never urged adoption of a smaller American Rescue Plan package,” she said, insisting that the funds have helped the United States economy weather the pandemic and the fallout from Russia’s war in Ukraine.Throughout the last year, Ms. Yellen has been an ardent public defender of the Biden administration’s economic agenda. She has clashed publicly at times with critics such as Lawrence H. Summers, a former Treasury secretary, who warned that too much stimulus could overheat the economy.For months, Ms. Yellen — and many other economists — talked about inflation as “transitory,” saying rising prices were the result of supply chain problems that would dissipate and “base effects,” which were making the monthly numbers look worse in comparison with prices that were depressed during the early days of the pandemic.By May of last year, Ms. Yellen appeared to acknowledge that the Biden administration’s spending proposals had the potential to overheat the economy. She noted at The Atlantic’s Future Economy Summit that the policies could spur growth and that the Fed might have to step in with “modest” interest rate increases if the economy revved up too much.“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy,” Ms. Yellen said.But economic indicators still suggested that inflation remained under control through much of that spring. In an interview with The New York Times last June, Ms. Yellen said she believed that inflation expectations were in line with the Federal Reserve’s 2 percent target and that while wages were increasing, she did not see a “wage price spiral” on the horizon that could cause inflation to become entrenched.“We don’t want a situation of prolonged excess demand in the economy that leads to wage and price pressures that build and become endemic,” she said, adding that she did not see that happening.Inflation F.A.Q.Card 1 of 5What is inflation? More
