Fed to signal rate hike as it launches risky inflation fight
AP Economics Writer
WASHINGTON — With inflation punishing consumers and threatening the economy, the Federal Reserve this week will likely signal its intent to begin raising interest rates in March for the first time in three years. The Fed’s challenges will get only harder from there.
Among the central bank officials, there is broad support for a rate increase — one that would come much sooner than the officials had expected just a few months ago. But after that, their policymaking will become more complicated and could sow internal divisions, especially as a number of new officials join the Fed.
How many times, for example, should the Fed raise rates this year? When should it start shedding its enormous stockpile of bonds, a move that would contribute to tighter credit? And how should the Fed respond if inflation eases later this year, as many officials expect, yet still remains far above its 2% annual target?
Some economists have expressed concern that the Fed is already moving too late to combat high inflation. Others say they worry that the Fed may act too aggressively. They argue that numerous rate hikes would risk causing a recession and wouldn’t slow inflation in any case. In this view, high prices mostly reflect snarled supply chains that the Fed’s rate hikes are powerless to cure.
“The consensus is that the time has come to move,” said Roberto Perli, chief economist at Cornerstone Macro and a former Fed staffer. “The debate is over how fast.”
When the Fed boosts its short-term rate, it tends to make borrowing more expensive for consumers and businesses, slowing the economy with the intent of reducing inflation.
Spooked by the prospect of higher rates, investors have been dumping stocks with abandon. Last week, a sell-off sent the S&P 500 index into its worst weekly loss since the pandemic erupted in March 2020. The tech-heavy Nasdaq has tumbled more than 10% from its peak, amounting to a full-blown “correction.”
This week’s Fed meeting, which will end Wednesday with a policy statement and a news conference with Chair Jerome Powell, comes against the backdrop of soaring inflation and an economy gripped again by a wave of COVID-19 infections. Over the past year, consumer prices have surged 7%, the fastest pace in nearly four decades.
Powell has acknowledged that he failed to foresee the persistence of high inflation, having long expressed the belief that it would prove temporary. The inflation spike has broadened into areas beyond those that were affected by supply shortages — apartment rents, for example — which suggests it could endure even after goods and parts flow more freely.
One reason Fed officials appear unified about an initial rate hike is that unemployment has fallen with surprising speed. At just 3.9% in December, the jobless rate is nearly at the five-decade lows that were reached before the pandemic. Economists expect Fed officials to indicate this week that they’ve achieved their goal of maximizing employment, thereby clearing the way to raise their benchmark short-term rate from near zero.