The Federal Reserve’s monetary policy committee meeting will conclude on Wednesday. Most analysts expect the Fed to raise its benchmark short-term federal funds rate by 75 basis points as a result of the 12-month consumer inflation rate rising in June to 9.1% from 8.6% in May.
The rate hike, to be announced at the conclusion of the Fed’s two-day policy meeting, will be the fourth this year and will likely match last month’s aggressive move. The Fed has received little indication so far that its accelerated rate hikes are having the desired effect, as people are feeling the pinch from rising rent, grocery, and gasoline prices. Compared to a year earlier, inflation hit a new high in June, increasing the likelihood of a recession as the Fed makes more aggressive efforts to rein in the economy.
According to some analysts, an interest rate hike of a full percentage point is still conceivable, given that inflation rose in almost every category in June. The Fed raised interest rates last month by 75 basis points, the largest one-time increase since 1994, to a range of 1.5% to 1.75%.
Although this was considered a likely scenario in the hours after the shocking June inflation announcement, the likelihood has been declining as a result of falling inflation expectations. According to the CME’s FedWatch tool, used to predict these increases, markets are pricing in a 74% chance of a three-quarter point rate hike and a 0% chance of a smaller hike or no hike at all.
According to Diane Swonk, chief economist at KPMG, “the Fed is now caught between a rock and a hard place, with no easy way out without the economy suffering.” Fed Chairman Jerome H. Powell has begun to emphasize this fact by acknowledging that a recession may be coming.
The first is whether or not these drastic rate hikes will be able to control inflation. They should do so at some point, but it is not clear when and by how much they will have to raise rates.
The second is the possibility that the Fed will inadvertently cause a recession, which is the second unsolved conundrum. No one knows the answer, although many discount that a recession is inevitable.
Households will be squeezed by higher borrowing costs in addition to the impact of purchases. Credit cards, auto loans, appliance financing, and mortgages will all rise in price.
Rapidly rising mortgage borrowing costs are also the result of aggressive rate hikes. In the past year, mortgage rates have nearly doubled. But the Fed prefers cooling rising demand to allow supply to catch up and lower costs.