WASHINGTON — In one of the most aggressive series of rate hikes since the economic crisis of the early 1980s, the Federal Reserve announced another three-quarters percentage point hike on Wednesday, signaling that efforts to reverse it were not complete. Inflation despite the increased risk of triggering a recession.
The sharp increase in the benchmark interest rate, which underlies the cost of loans on credit cards, home loans and other products, is intended to further cool the economy to contain price pressures.
The Fed took note of the slowdown in its statement announcing interest rate changes. The Fed said it will continue to raise interest rates as it works to bring inflation back to its 2% target, as spending and production indicators have recently eased.
Central bank efforts have profound implications for the US and global economies. As the Fed tries to change direction between rock and hard, the political stakes have increased, especially for Democrats, as voters in the upcoming congressional elections will not like continued increases in prices or job-lossing declines. and other undesirable consequences.
If there’s a bright spot for Biden and his party, there’s good news for gasoline prices dropping from their peak in June and economic indicators that most Americans don’t usually pay much attention to. call.
One of the outgrowths of the Fed’s rate hike campaign has been the dollar’s surge in recent months, which has made products in Europe, Asia and elsewhere cheaper to US buyers.
The strength of the dollar is starting to make it a little easier for shoppers to deal with inflation in some commodities, as the US buys trillions of dollars of imported goods each year, including a variety of items such as clothing, electronics, flowers and fresh vegetables. .
“This is one of the few forces fighting food price inflation,” said Ricky Volpe, professor of agricultural management at Cal Poly San Luis Obispo, pointing to the ongoing food supply challenges related to labor, weather, transportation and energy.
In June, U.S. consumer spending on home-produced food was up 12.2% from a year earlier. This has helped boost overall inflation to 9.1%, a 40-year high. Grain and bread, eggs and milk, and poultry products have risen much faster in recent months. On the other hand, the prices of imported foods such as vegetables and fish are on the decline.
Northern Trust chief economist Carl Tannenbaum said cheaper imports could make a relatively small but notable help in lowering US inflation as more businesses pass their savings on to consumers.
The downside for US multinationals is that their overseas exports and sales will suffer.
Tannenbaum said the rapid and sharp rise in the dollar is causing real pain for some developing countries as they face more dollar payments on debt and commodities. Sri Lanka’s recent political turmoil has reflected a severe economic crisis, including a dollar shortage and the national currency, which is now depreciating more than 80% against the US dollar.
But for US voters, the drop in import prices could offer some relief from decades of high inflation as companies like Walmart are now starting to cut commodity prices due to excess inventory and slowing demand.
Jack Ablin, chief investment officer at Cresset Capital, said he thinks inflation could have peaked in June and July. The national average gasoline price on Wednesday was $4.30 a gallon, down from $4.90 a month earlier.
“There is growing evidence that consumers’ willingness and ability to spend is increasingly exhausting,” he said in a note to customers. “Furthermore, households appear to have been spending through a pandemic-supported cash reserve, as evidenced by recent surges in credit card debt and a growing number of overdue customer bills at AT&T.”
On Thursday, the government is expected to release data showing the US economy contracted in the second quarter after previous reports that activity contracted in the first three months of the year. Republicans are likely to jump all over the news, as consecutive quarters in real gross domestic product (GDP), or economic output, are generally seen as evidence of a recession.
The official decision of a recession is based on a set of data, and most economists say that a negative second-quarter GDP could constitute a “technical recession,” but the US doesn’t appear to be in a complete recession right now. So far, employment has been well maintained, and the picture of consumer spending, which accounts for two-thirds of economic activity, is still mixed.
Currently, Q3 GDP looks sluggish for now. And what happens the rest of the summer and beyond will depend, at least in part, on what the Fed is doing and how people respond to efforts to control inflation.
The Fed’s rate move on Wednesday marks its fourth hike this year and raises the benchmark interest rate to nearly 2.5%, a neutral level that is neither stimulating nor limiting to the economy.
Now the question is, how much more will the central bank do? In their June forecasts, Fed officials expected key interest rates to end the year at nearly 3.5%. And Fed Chairman Jerome H. Powell could provide more guidance at a press conference on Wednesday afternoon.
However, there are several factors that will affect inflation and growth, including the Ukraine war, the global economic situation, and China’s containment of the epidemic, which are highly uncertain and far beyond the control of the Fed.
Supply chain problems in ports and other parts of the logistics system have eased somewhat in recent weeks, but parts and goods are still scarce, especially for new cars.
Shawn DuBravac, economist and president of the consulting firm Avrio Institute, says it will take time for order backs to clear and businesses to adapt to supply chain changes. But he said more companies don’t have the pricing power they had at the beginning of the year because of slowing demand and relatively high inventories of items like clothing.
Recently, several large companies, including Microsoft, General Motors, Alphabet and Walmart, have reported lower earnings. And businesses in finance, housing and some other sectors are lowering prospects and cutting jobs.
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