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    Federal Reserve Makes Another Supersized Rate Increase to Tame Inflation

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    The central bank raised rates by three-quarters of a percentage point and suggested additional large increases could be warranted.The Federal Reserve chair, Jerome H. Powell, spoke to reporters after officials met to raise rates.Jim Lo Scalzo/EPA, via ShutterstockWASHINGTON — The Federal Reserve continued its campaign of rapid interest rate increases on Wednesday, pushing up borrowing costs at the fastest pace in decades in an effort to wrestle inflation under control.Fed officials voted unanimously at their July meeting for the second supersized rate increase in a row — a three-quarter-point move — and signaled that another large adjustment could be coming at their next meeting in September, though that remains to be decided. The decision on Wednesday puts the Fed’s policy rate in a range of 2.25 to 2.5 percent.The central bank’s brisk moves are intended to slow the economy by making it more expensive to borrow money to buy a house or expand a business, weighing on the housing market and economic activity more broadly. Jerome H. Powell, the Fed chair, said during a news conference after the meeting that such a cool-down was needed to allow supply to catch up with demand so that inflation could moderate.Mr. Powell acknowledged that the Fed’s policy changes were likely to inflict some economic pain — in particular, weakening the labor market. That has made the central bank’s rate increases unwelcome among some Democrats, who argue that crushing the economy is a crude way to lower today’s inflation rate. But the Fed chair stressed that the economic sacrifice today was necessary to put America back on a sustainable longer-term path with slow and predictable price increases.“We need growth to slow,” Mr. Powell said. “We don’t want this to be bigger than it needs to be, but ultimately, if you think about the medium- to longer term, price stability is what makes the whole economy work.”Stocks surged after the Fed’s decision and Mr. Powell’s news conference. Some rates strategists asked why, because Mr. Powell’s comments aligned with the message Fed officials have consistently sent: Inflation is too high, the central bank is determined to crush it, and interest rates are likely to further increase this year.“There’s a lot of information between now and the September meeting, and I think markets will reassess,” said Priya Misra, head of Global Rates Strategy at TD Securities. “This is an even more data-dependent Fed — and it is going to come down to whether inflation gives them the space to slow down.”The Fed began raising interest rates from near-zero in March, and policymakers have picked up the pace sharply since in reaction to incoming economic data, as price increases have continued to accelerate at an alarming rate.After making a quarter-point move to start, the central bank raised rates by half a point in May and by three-quarters of a point in June, which was the largest single step since 1994. Officials could keep raising rates briskly in September, or they could ease off the pace, depending on how the economy evolves.“We might do another unusually large rate increase,” Mr. Powell said on Wednesday. “But that is not a decision we have made at all.”What the Fed’s Rate Increases Mean for YouCard 1 of 4A toll on borrowers. More

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    How Will Interest Rate Increases Impact Inflation?

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    The Federal Reserve is raising interest rates to fight inflation. Some economists want more; some politicians want less. What’s the logic?The Federal Reserve is expected to announce its fourth interest rate increase of 2022 on Wednesday as it races to tamp down rapid inflation. The moves have a lot of people wondering why rate increases — which raise the cost of borrowing money — are America’s main tool for cooling down prices.Senator Elizabeth Warren, the Massachusetts Democrat, wrote an opinion piece in The Wall Street Journal on Sunday arguing that the Fed’s demand-crushing rate increases are not the right policy to fight today’s inflation as fuel costs and supply chain turmoil push up prices. The policies will hurt workers, she said, and “it doesn’t have to be this way.”Others have argued that the Fed should continue to be forceful. Lawrence H. Summers, the former Democratic Treasury secretary, argued during an interview on CNN this week that the Fed needed to take “strong action” to control inflation and that allowing inflation to gallop out of control would be the “bigger mistake” than causing a recession.Onlookers could be excused for struggling to make sense of the debate. Fed officials themselves acknowledge that their tools are blunt, that they cannot fix broken supply chains and that it will be difficult to slow the economy enough without causing an economic downturn. So why is the Fed doing this?America’s central bank has for decades been what Paul Volcker, its chair in the 1980s, called “the only game in town” when it comes to fighting inflation. While there are things that elected leaders can do to combat rising prices — raising taxes to curb consumption, spending more on education and infrastructure to improve productivity, helping flailing industries — those targeted policies tend to take time. The things that elected policymakers can do quickly generally help mainly around the edges.But time is of the essence when it comes to controlling inflation. If price increases run fast for months or years on end, people begin to adjust their lives accordingly. Workers might ask for higher wages, pushing up labor costs and prompting businesses to charge more. Companies might begin to believe that consumers will accept price increases, making them less vigilant about avoiding them.By making money more expensive to borrow, the Fed’s rate moves work relatively quickly to temper demand. As buying a house or a car or expanding a business becomes pricier, people pull back from doing those things. With fewer consumers and companies competing for the available supply of goods and services, price gains are able to moderate.Unfortunately, that process could come at a hefty cost at a moment like this one. Bringing the economy into balance when supply is constrained — cars are hard to find because of semiconductor shortages, furniture is on back order, and jobs are more plentiful than laborers — could require a big decline in demand. Slowing the economy down that meaningfully could tip off a recession, leaving workers unemployed and families with lower incomes.Economists at Goldman Sachs, for example, estimate that the probability of a recession over the next two years is 50 percent. Already, signs abound that the economy is slowing as the Fed begins to push rates higher, with overall growth data, housing market trackers and some metrics of consumer spending showing a pullback.But central bankers believe that even if the risks are difficult to bear, they are necessary. A downturn that pushes unemployment higher would undoubtedly be painful, but inflation is also a major impediment for many families today. Getting it under control is critical to putting the economy back on a sustainable path, officials argue.“It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all,” Jerome H. Powell, the Fed chair, said at his news conference last month. More

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    How U.S. Inflation Expectations Are Being Shaped by Consumer Choices

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    How Bacon and Costco Fish Shape America’s View of InflationEconomic policymakers are razor focused on inflation expectations after more than a year of rapid price increases. Consumers explain how they’re thinking about rising costs.Jeanna Smialek and July 27, 2022Inflation started in the bacon aisle for Dan Burnett, a 58-year-old former medical center administrator who lives in Margaretville, N.Y.Last summer, he began to notice that the breakfast staple was increasing sharply in price, jumping to $10 from $8 per pack at his local grocer. Before long, a wide variety of food products were more expensive — so many that he began driving 45 miles to shop at Aldi and Walmart, hoping to score better deals. This summer, it seems that inflation is across the board, pushing up prices on brake repair, hotel rooms and McDonald’s fries.“My biggest fear is that they don’t get it under control, and that it just persists,” Mr. Burnett said. He is thinking about how he might have to reshape his financial future in a world where prices — which had long increased at a rate of 2 percent or less per year — now climb by considerably more.“Once people get this mind-set of ‘You can increase prices and people will just pay it,’ you’re off to the races.” Dan BurnettPeople like Mr. Burnett, who is beginning to believe that America’s price burst might last, are the Federal Reserve’s biggest fear. If consumers and companies expect fast inflation to be a permanent feature of the American economy, they might begin to shift their behavior in ways that cause prices to keep rising. Consumers might begin to accept price increases without shopping around, workers might demand higher pay to cover climbing costs, and businesses might raise prices both to cover their higher labor bills and because they think customers will stomach the heftier price tags.Economists often blame that sort of spiraling inflationary mind-set for fueling rapid price gains in the 1970s and 1980s, a painful episode in which inflation proved difficult to tame. That is why the Fed, which is responsible for keeping inflation under control, has been focusing on a range of inflation expectation measures, hoping that a high-price psychology is not taking hold.Most signs suggest that people still believe that inflation will fade with time. But interpreting inflation expectations is more art than science: Economists disagree about which metrics matter, how to measure them and what could make them change. And after more than a year of rapid price increases, central bank officials are increasingly worried that it’s foolish to take the stability of price expectations for granted. Officials have been rapidly raising interest rates to try to cool the economy and send a signal to the public that they are serious about wrestling price increases lower.“There’s a clock running here, where we have inflation running now for more than a year,” Jerome H. Powell, the Fed chair, said recently. “It would be bad risk management to just assume those longer-term inflation expectations would remain anchored indefinitely in the face of persistent high inflation. So we’re not doing that.”Central bankers closely watch measures including the University of Michigan’s longer-term inflation outlook survey as they try to judge whether expectations remain under wraps. Those have moved up since 2020, but have not jumped by as much as actual inflation. Still, those trackers show only where expectations are today. They say little about when they might change or what might shift them. To get a more detailed, qualitative sense of how consumers are thinking about inflation, The New York Times asked readers what costs were sticking out to them, how much inflation they expected and how they were forming that opinion. The takeaway: While many people still expect inflation to ease with time, that assumption is a fragile one as many Americans experience the fastest inflation of their adult lives across a broad range of goods and services.Grocery and gas prices are weighing heavily on many people’s minds, consistent with research about how consumers form price expectations. But the particular products raising eyebrows vary widely and expand beyond just food and gas.Guitars, rent and pedicures are getting more expensive in California. Artisan crafts are commanding higher prices in New Mexico.Pedicures are getting more expensive in California.People are coping with the climbing costs in a range of ways. Many said they were cutting consumption, which could help inflation to ease by lowering demand and giving supply a chance to catch up. A few were continuing to buy, hoping that costs would moderate with time. But others were asking for more pay or trying to find other ways to cover their climbing costs while resigning themselves to increasing prices.For Siamac Moghaddam, a 37-year-old who is in the Navy and lives in San Diego, dealing with inflation has been less about cutting down on little things — like the pedicures he enjoys getting, since he is in boots all the time — and more about saving on big expenses, like rent. His landlord recently raised his apartment rent by $200, so he moved out of his two bedroom and into a one bedroom.“Everyone’s adjusting,” he said. He thinks the Fed’s rate increases will bring inflation under control, though in the process, “I think we’re going to suffer economically.”Robert Liberty, 68 and from Portland, Ore., is trying to save on food and travel.“I reached for an avocado in the store, and I jerked back my hand like it was about to be burned when I saw the price — it was $5.50 per avocado,” said Mr. Liberty, a part-time lawyer and consultant whose husband works full time. He thinks inflation will moderate, though he’s unsure how much. For now, an avocado, he said, is “one thing we can do without.”“I quit Starbucks. I had to. I just didn’t feel like that was justifiable. It’s like a small car payment.” Fontaine WeymanFontaine Weyman, a 43-year-old songwriter from Charleston, S.C., is more toward the middle of the inflation-expectations range. Ms. Weyman delivers for Instacart and, with her husband, has a household income of around $80,000. Starbucks has always been her personal indulgence, but she’s cutting it out.“It’s $6.11 for just a Venti iced coffee with a little bit of cold foam on top — that’s like $180 a month,” Ms. Weyman said. While she still believes inflation will fade with time, she and her husband are thinking about how to increase their household income in case it doesn’t.“We know that he’ll most likely get a 5 to 10 percent raise anyway in March, but I’ve asked him to ask for 15 percent,” she said.That pattern — cutting back and hoping for the best but also planning for a possible higher-inflation future — is the one Susan Hsieh is embracing as she watches costs at Costco climb. Ms. Hsieh lives in Armonk, N.Y., with her husband and two teenage children, and has cut back on buying frozen Chilean sea bass fillets as they jump sharply in price, which is sad news for her family.“That fish is really tasty,” she said.Chilean sea bass has become more expensive at Costco.Rising costs across goods and services have also prompted Ms. Hsieh, who works at a branch of the United States Treasury, to ask for higher pay this year. She knew the 2.2 percent raise she was going to get as a typical cost-of-living adjustment was not going to keep up with inflation. She ended up just shy of a 5 percent raise.“I think I’m going to ask again,” she said of her salary negotiation this coming year, assuming inflation sticks around.Mr. Burnett, buyer of bacon, might offer the clearest illustration of why expectations for faster inflation could spell trouble for the Fed if they begin to take hold in earnest. For him, the breadth of today’s price changes makes it hard to believe that inflation will fade soon.Mr. Burnett, who is retired, is thinking about adapting his life accordingly. He co-owns a condominium in Florida with his sister, and maintenance fees on the unit are going up. Though he rents the condo to tenants for only part of the year, he’s likely to pass the full increase onto them.He likes the tenants and doesn’t want to raise rents by so much that he pushes them out, but he could also see himself and his sister charging even more if they notice that neighboring landlords are pushing prices higher.“I really want to make sure that I’m maximizing income,” he said, given the inflation. And he thinks other people will do the same, which is what makes him think inflation is unlikely to fade soon. “Once people get this mind-set of ‘You can increase prices and people will just pay it,’ you’re kind of off to the races.” More

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    Strong Wage and Jobs Growth Keeps Fed on Track for Big Rate Increase

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    The Federal Reserve is trying to cool down the economy to bring inflation under control, but the job market is still going strong.A surprisingly robust June employment report reinforced that America’s labor market remains historically strong even as recession warnings reach a fever pitch. But that development, while good news for the Biden administration, is likely to keep the Federal Reserve on its aggressive path of interest rate increases as it tries to cool the economy and slow inflation.Today’s world of rapid price increases is a complicated one for economic policymakers, who are worried that an overheating job market could exacerbate persistent inflation. Instead of viewing roaring demand for labor as an unmitigated good, they are hoping to engineer a gradual and controlled slowdown in hiring and wage growth, both of which remain unusually strong. Friday’s report offered early signs that the desired cooling is taking hold as both job gains and pay increases moderated slightly. But hiring and earnings remained solid enough to reinforce the view among Fed officials that the labor market, like much of the economy, is out of whack: Employers still want far more workers than are available. The new data will likely keep central bankers on track to make another supersize rate increase at their meeting later this month as they try to restrain consumer and business spending and force the economy back into balance. “We’re starting to see those first signs of slowdown, which is what we need,” Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in a CNBC interview after the report was released. Still, he called the wage data “only slightly” reassuring and said that “we’re starting to inch in the right direction, but there’s still a lot more to do, and a lot more we’ll have to see.”Fed officials began to raise interest rates from nearly zero in March in an attempt to make borrowing of many kinds more expensive. Last month, the central bank lifted its policy rate by 0.75 percentage points, the largest single increase since 1994. Central bankers typically adjust their policy only in quarter-point increments, but they have been picking up the pace as inflation proves disturbingly rapid and stubborn. While Fed policymakers have said they will debate a move between 0.5 or 0.75 percentage points at their meeting on July 26 and 27, a chorus of officials have in recent days said they would support a second 0.75 percentage point move given the speed of inflation and strength of the job market.As the Fed tries to tap the brakes on the economy, Wall Street economists have warned that it may instead slam it into a recession — and the Biden administration has been fending off declarations that one is already arriving. A slump in overall growth data, a pullback in the housing market and a slowdown in factory orders have been fueling concern that America is on the brink of a downturn. Construction workers in New York City. Employers added 372,000 workers in June.Hiroko Masuike/The New York TimesThe employment data powerfully contradicted that narrative, because a shrinking economy typically does not add jobs, let alone at the current brisk pace. Mr. Biden celebrated the report on Friday, saying that “our critics said the economy was too weak” but that “we still added more jobs in the past three months than any administration in nearly 40 years.”Private sector voices concurred that the employment report showed an economy that did not appear to be tanking. “Wage growth remains elevated and rates of job loss are low,” Nick Bunker, economic research director at the job website Indeed, wrote in a reaction note. “We’ll see another recession some day, but today is not that day.”The State of Jobs in the United StatesJob gains continue to maintain their impressive run, easing worries of an economic slowdown but complicating efforts to fight inflation.June Jobs Report: U.S. employers added 372,000 jobs and the unemployment rate remained steady at 3.6 percent ​​in the sixth month of 2022.Care Worker Shortages: A lack of child care and elder care options is forcing some women to limit their hours or has sidelined them altogether, hurting their career prospects.Downsides of a Hot Market: Students are forgoing degrees in favor of the attractive positions offered by employers desperate to hire. That could come back to haunt them.Slowing Down: Economists and policymakers are beginning to argue that what the economy needs right now is less hiring and less wage growth. Here’s why.The contradictory moment in the economy — with prices rising fast, economic growth contracting and the unemployment rate hovering near a 50-year low — has posed a challenge for Mr. Biden, who has struggled to convey sympathy for consumers struggling with higher prices while seeking credit for the strength of the jobs recovery. Mr. Biden’s approval ratings have slumped as price growth has accelerated. Confidence has taken an especially pronounced battering in recent months amid rising gas prices, which topped $5 a gallon on average earlier this summer. On Friday, Mr. Biden emphasized that fighting inflation was his top economic priority while also praising recent job market progress. “I know times are tough,” Mr. Biden said, speaking in public remarks. “Prices are too high. Families are facing a cost-of-living crunch. But today’s economic news confirms the fact that my economic plan is moving this country in a better direction.” But unfortunately for the administration and for workers across America, tackling high prices will probably come at some cost to the labor market. As price increases bedevil consumers at the gas pump and in the grocery aisle, the Fed believes that it needs to bring inflation under control swiftly in order to set the economy on a path toward healthy and sustainable growth. The Fed’s tool to achieve that positive long-term outcome works by causing short-term economic pain. By making money expensive to borrow, the central bank can slow down home buying and business expansions, which will in turn slow hiring and wage increases. As companies and families have fewer dollars to spend, the theory goes, demand will come into better alignment with supply and prices will stop rocketing higher. Officials expect unemployment to eventually tick up as rate increases bite and the economy weakens, though they are hoping that it will only rise slightly. Fed policymakers are still hoping to engineer what they often call a “soft landing,” in which hiring and pay gains slow gradually, but without plunging the economy into a painful recession. But pulling it off will not be easy — and officials are willing to clamp down harder if that is what it takes to tame inflation. “Price stability is absolutely essential for the economy to achieve its potential and sustain maximum employment over the medium term,” John C. Williams, the president of the Federal Reserve Bank of New York, said in a speech in Puerto Rico on Friday. “I want to be clear: This is not an easy task. We must be resolute, and we cannot fall short.”Federal funds rate since January 1998

    Rate is the federal funds target rate until Dec. 15, 2008, and thereafter it is the upper limit of the federal funds target rate range.Source: The Federal ReserveBy The New York TimesStocks fell after the release of the employment numbers, likely because investors saw them as a sign that the Fed would continue constraining the economy.“The tremendous momentum in the economy to me suggests that we can move at 75 basis points at the next meeting and not see a lot of protracted damage to the broader economy,” Mr. Bostic said Friday.Fed officials are closely watching wage data in particular. Average hourly earnings climbed by 5.1 percent in the year through June, down slightly from 5.3 percent the prior month. Wages for non-managers climbed by a swift 6.4 percent from a year earlier. While that pace of increase is slowing somewhat, it is still much higher than normal — and could keep inflation elevated if it persists, as employers charge more to cover climbing labor costs.“Wages are not principally responsible for the inflation that we’re seeing, but going forward, they would be very important, particularly in the service sector,” Jerome H. Powell, the Fed chair, said at his news conference in June.“If you don’t have price stability, the economy’s really not going to work the way it’s supposed to,” he added later. “It won’t work for people — their wages will be eaten up.”Wage growth may be slowing in retail and hospitality jobs.Percent change in earnings for nonmanagers since January 2019 by sector More

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    Fed Confronts a ‘New World’ of Inflation

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    Central banks had a longstanding playbook for how inflation worked. In the postpandemic era, all bets are off.Federal Reserve officials are questioning whether their longstanding assumptions about inflation still apply as price gains remain stubbornly and surprisingly rapid — a bout of economic soul-searching that could have big implications for the American economy.For years, Fed policymakers had a playbook for handling inflation surprises: They mostly ignored disruptions to the supply of goods and services when setting monetary policy, assuming they would work themselves out. The Fed guides the economy by adjusting interest rates, which influence demand, so keeping consumption and business activity chugging along at an even keel was the primary focus.But after the global economy has been rocked for two years by nonstop supply crises — from shipping snarls to the war in Ukraine — central bankers have stopped waiting for normality to return. They have been raising interest rates aggressively to slow down consumer and business spending and cool the economy. And they are reassessing how inflation might evolve in a world where it seems that the problems may just keep coming.If the Fed determines that shocks are unlikely to ease — or will take so long that they leave inflation elevated for years — the result could be an even more aggressive series of rate increases as policymakers try to quash demand into balance with a more limited supply of goods and services. That painful process would ramp up the risk of a recession that would cost jobs and shutter businesses.“The disinflationary forces of the last quarter-century have been replaced, at least temporarily, by a whole different set of forces,” Jerome H. Powell, the Fed chair, said during Senate testimony on Wednesday. “The real question is: How long will this new set of forces be sustained? We can’t know that. But in the meantime, our job is to find maximum employment and price stability in this new economy.”When prices began to pick up rapidly in early 2021, top Fed policymakers joined many outside economists in predicting that the change would be “transitory.” Inflation had been slow in America for most of the 21st century, weighed down by long-running trends like the aging of the population and globalization. It seemed that one-off pandemic shocks, especially a used-car shortage and ocean shipping issues, should fade with time and allow that trend to return.But by late last year, central bankers were beginning to rethink their initial call. Supply chain problems were becoming worse, not better. Instead of fading, price increases had accelerated and broadened beyond a few pandemic-affected categories. Economists have made a monthly habit of predicting that inflation has peaked only to see it continue to accelerate.Now, Fed policymakers are analyzing what so many people missed, and what it says about the unrelenting inflation burst.“Of course we’ve been looking very carefully and hard at why inflation picked up so much more than expected last year and why it proved so persistent,” Mr. Powell said at a news conference last week. “It’s hard to overstate the extent of interest we have in that question, morning, noon and night.”The Fed has been reacting. It slowed and then halted its pandemic-era bond purchases this winter and spring, and it is now shrinking its asset holdings to take a little bit of juice out of markets and the economy. The central bank has also ramped up its plans to raise interest rates, lifting its main policy rate by a quarter point in March, half a point in May and three-quarters of a point last week while signaling more to come.Understand Inflation and How It Impacts YouInflation 101: What’s driving inflation in the United States? What can slow the rapid price gains? Here’s what to know.Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.An Economic Cliff: Inflation is expected to remain high later this year even as the economy slows and layoffs rise. For many Americans, it’s going to hurt.Greedflation: Some experts say that big corporations are supercharging inflation by jacking up prices. We take a closer look at the issue. It is making those decisions without much of an established game plan, given the surprising ways in which the economy is behaving.“We’ve spent a lot of time — as a committee, and I’ve spent a lot of time personally — looking at history,” Patrick Harker, president of the Federal Reserve Bank of Philadelphia, said in an interview on Wednesday. “Nothing quite fits this situation.”A recruiter at a job fair in North Miami Beach, Fla., last week. Labor shortages are pushing up wages, which is likely contributing to higher inflation. Scott McIntyre for The New York TimesGas prices have helped drive inflation higher.Scott McIntyre for The New York TimesThe economic era before the pandemic was stable and predictable. America and many developed economies spent those decades grappling with inflation that seemed to be slipping ever lower. Consumers had come to expect prices to remain relatively stable, and executives knew that they could not charge a lot more without scaring them away.Shocks to supply that were outside the Fed’s control, like oil or food shortages, might push up prices for a while, but they typically faded quickly. Now, the whole idea of “transient” supply shocks is being called into question.The global supply of goods has been curtailed by one issue after another since the onset of the pandemic, from lockdowns in China that slowed the production of computer chips and other goods to Russia’s invasion of Ukraine, which has limited gas and food availability.At the same time, demand has been heady, boosted by government pandemic relief checks and a strong labor market. Businesses have been able to charge more for their limited supply, and consumer prices have been picking up sharply, climbing 8.6 percent over the year through May.Research from the Federal Reserve Bank of San Francisco released this week found that demand was driving about one-third of the current jump in inflation, while issues tied to supply or some ambiguous mix of supply-and-demand factors were driving about two-thirds.That means that returning demand to more normal levels should help ease inflation somewhat, even if supply in key markets remain roiled. The Fed has been clear that it cannot directly lower oil and gas prices, for instance, because those costs turn more on the global supply than they do on domestic demand.“There’s really not anything that we can do about oil prices,” Mr. Powell told senators on Wednesday. Still, he added later, “there is a job to moderating demand so that it can be in better balance with supply.”Inflation F.A.Q.Card 1 of 5What is inflation? More

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    Why the Fed Is Risking a Recession

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    Home sales are flagging and the rest of the economy is expected to slow, maybe sharply, as rates increase. Why is the Federal Reserve doing this?Recession fears are ramping up as the Federal Reserve embarks upon an aggressive campaign to raise interest rates, and politicians and members of the public are increasingly questioning why central bankers are planning to cause the economy pain.The short answer is: This is the tool the Fed has to bring inflation under control.The central bank is trying to force price increases to slow down. It does that by raising interest rates, which makes mortgages, car loans and business borrowing more expensive. As money becomes pricier, it weighs on spending and hiring, weakening the job market and the broader economy — maybe notably. Slower growth will give supply a chance to catch up with demand.The adjustment process is already an unpleasant one: Stock prices have fallen, home sales are beginning to slow and unemployment is likely to rise. But the Fed has one way to beat inflation back in line, and that is by hammering households and companies until they stop spending so much. Central bankers have acknowledged that the transition could be bumpy and that a recession is a real risk.“Monetary policy is famously a blunt tool,” Jerome H. Powell, the Fed chair, said during testimony before senators on Wednesday. “There’s risk that weaker outcomes are certainly possible, but they are not our intent.”At the same time, they say that not trying to cool down inflation — allowing it to continue ratcheting higher, and to become entrenched — would be the bigger problem.“This is very high inflation, and it’s hurting everybody,” Mr. Powell said.Fed officials have argued that they might be able to slow down the economy enough to allow inflation to moderate without choking demand so much that it plunges America into recession. Central bankers forecast last week that they will push unemployment up slightly, but not sharply, this year and next.But that gentle landing is far from certain. As shocks continue to rock the economy — the war in Ukraine has pushed up food and fuel costs, Chinese lockdowns to contain the pandemic have slowed factory production and shipping snarls linger — it has meant that the central bank may have to slow down demand even more to bring it in line with a constrained supply of goods and services.“It’s certainly a possibility; it’s not our intention at all,” Mr. Powell said of a recession. “Certainly the events of the last few months around the world have made it more difficult for us to achieve what we want, which is 2 percent inflation and still a strong labor market.” More

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    The Fed Raises Interest Rates by 0.75 Percentage Points to Tackle Inflation

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    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