Chair Jerome Powell on Sept. 21 said the Federal Reserve is raising its interest rate by three-quarters of a percentage point to tackle inflation. (Video: The Washington Post)
Updated September 21, 2022 at 4:05 p.m. EDT|Published September 21, 2022 at 6:00 a.m. EDT
The Federal Reserve will not back down from its fight against inflation even though aggressive moves to slow the economy will inevitably bring pain to households and businesses nationwide, the central bank’s chief said Wednesday as the bank raised interest rates yet again.
View live politics updates
“We have got to get inflation behind us,” Federal Reserve Chair Jerome H. Powell said. “I wish there were a painless way to do that. There isn’t.”
The message came after the central bank raised rates by 0.75 percentage points for the third time this year and released new economic projections showing a significant slowdown in the economy later in 2022 and 2023. People are suffering from high inflation — especially more vulnerable households, Powell said — and they’ll ultimately suffer more, and for longer, if the Fed flinches in its commitment to pulling prices back down.
That could mean a recession, job losses, higher credit costs or other unknown consequences. But Powell said letting inflation continue would be worse and that “delay is only likely to lead to more pain.”
The bank’s new projections — including for meager economic growth and rising unemployment — indicate that officials expect their year-long campaign to raise interest rates will have its intended effect soon. But Powell also said the Fed would “keep at it until it’s done” and gave no indication that the bank is ready to ease up on its policies.
“What they don’t want to be doing is halfway fighting inflation now, and then backing off and having to do it again when higher inflation expectations have become more entrenched,” said Stephanie Aaronson, vice president and director of the economic studies program at the Brookings Institution and a former Fed economist. “That would be very painful.”
Why does the Fed raise interest rates?
This month’s rate hike was the fifth of the year, and the third consecutive three-quarter point hike. Such an increase would have been considered outlandishly large until recently. But the Fed has been in a race to push rates past the “neutral” zone of roughly 2.5 percent, where rates don’t slow or juice the economy, and into “restrictive territory” that dampens consumer demand. The Fed’s benchmark interest rate now sits between 3 percent and 3.25 percent, and officials expect it to cross 4 percent by the end of the year, well into what’s considered restrictive. That rate doesn’t directly control rates for mortgages and other loans, but it influences how much banks and other financial institutions pay to borrow, which helps drive loan pricing more broadly.
The sharp rate hikes also reflect central bank officials’ missteps in identifying the threat inflation posed to the economy. The Fed held off on raising rates last year, with Powell and other top Fed leaders saying they believed that the slow creep in inflation throughout 2021 would be temporary. Since it became clear they were wrong, policymakers have had to catch up to inflation that rapidly escalated beyond their control.
The markets have been especially anxious about a looming recession and the Fed’s promises of higher rates. Stocks tumbled in volatile trading Wednesday, with major stock market indexes all dropping about 1.7 percent after some swings in both directions.
Traders in financial markets also appear wary that the Fed’s moves, combined with those of other central banks, are steering the global economy toward a recession. The Fed is among at least eight central banks expected to raise borrowing costs this week, and economists are becoming increasingly worried that many nations’ economies won’t be able to withstand such an extreme slowdown.
Global economy weakening amid inflation fight, war and lingering pandemic
Powell made clear that Fed officials are not seeing anywhere near the kind of progress necessary to say its policies are taking hold. But the housing market, which is particularly sensitive to higher rates, may be a sign that its moves are starting to work. Mortgage rates have escalated in recent months, and Wednesday’s announcement could mean even higher mortgage rates in the coming weeks. The interest rate for a 30-year fixed mortgage, the most popular home loan, spiked above 6 percent last week for the first time in 14 years, according to data from Freddie Mac.
Fed watchers and market analysts also got some sense of what the bank expects through its latest set of economic projections, which are revised every three months. The last time the Fed released projections, in June, it forecast that the economy would grow 1.7 percent in 2022. That figure was revised down significantly, to 0.2 percent.
Officials also expect inflation will remain high at the end of the year — 5.4 percent using the Fed’s preferred gauge, which was at 6.3 percent in July — before falling closer to normal levels next year.
On future rate hikes, Fed officials penciled in another increase of three-quarters of a percentage point and one half-point hike for the two remaining meetings of the year. The projections also show rates climbing slightly next year before cuts in 2024. But Powell noted that the bank makes decisions one meeting at a time.
“No one knows with any certainty where the economy will be a year or more from now,” he said.
So far, the job market and consumer spending — two crucial economic engines — have stayed resilient through the Fed’s sharp rate hikes. But Powell has warned before that the fight for price stability will probably mean that the job market will soften. Officials expect the unemployment rate, currently 3.7 percent, will end the year at 3.8 percent before rising to 4.4 percent by the end of 2023.
That would typically also portend a recession, which generally follows whenever the unemployment rate climbs by a half-percentage point or more.
Labor market added 315,000 jobs in August, a bright spot in the economy
In an analyst note, Joe Brusuelas, chief economist at RSM, gave a bleaker assessment of where the job market may be headed. He estimates that for inflation to come down to 3 percent — which is still higher than the Fed’s target of 2 percent — the unemployment rate could go up to 4.7 percent and lead to a loss of 1.7 million jobs.
“To get the inflation rate back to 2 percent, job losses could land well above 5.3 million and result in an unemployment rate of 6.7 percent at the upper end of the range,” Brusuelas wrote.
Fed projections are often wrong, and any estimates tend to be a subpar match for the uncertainty of the coronavirus era. Russia’s invasion of Ukraine caused a global energy crisis that pushed inflation even higher. Ongoing supply chain issues, plus an out-of-whack job market, have made it more difficult for the Fed to solve inflation with rate hikes alone.
Wendy Edelberg, director of the Hamilton Project and former chief economist at the Congressional Budget Office, said the specific projections ultimately matter less than Powell’s overarching point that “regardless of whatever we’ve written down, we will do enough because we just will.”
“The most important question is, are they going to do enough to slow inflation?” Edelberg said. “And the answer is ‘yes.’”
Abha Bhattarai, David J. Lynch and Hamza Shaban contributed to this report.
Stocks tumble in volatile trading; Dow falls more than 500 points
Return to menu
Stocks tumbled in volatile trading Wednesday after the Federal Reserve confirmed it was extending its interest rate hike campaign to combat inflation.
The Dow Jones industrial average, which recorded triple-digit swings in both directions, shed more than 522 points, or 1.7 percent, to close just shy of 30,184. The S&P 500 erased 66 points, or 1.7 percent, to end near 3,790. The tech-heavy Nasdaq dropped nearly 205 points, or 1.8 percent, to settle above 11,220.
Markets have been skittish for days in anticipation of the Fed’s decision. On Wednesday, policymakers raised rates by three-quarters of a percentage point for the third time since June. The Fed also boosted rates by 50 basis points in May and 25 basis points in March.
Seven ways to lower your credit card debt as the Fed raises rates
Return to menu
It is the worst debt to carry in good times. It can be oppressive when the economy is battling high inflation, a tumbling stock market and now rising interest rates.
Got credit card debt? Now is the time to develop a plan to pay down this debt as soon as possible because it will get even more expensive.
Maybe you’ve been keeping your credit card debt around like a pet rock, pecking at it little by little with minimum payments or occasionally throwing some extra cash at the balance. Or perhaps your financial circumstances forced you to rely on credit to make ends meet. Whatever your situation, here are seven ways to lower your credit card debt in light of this latest Fed rate hike and additional increases that probably are coming soon.
Gas prices fall, but other costs continue to climb
Return to menu
Monthly change in overall consumer prices
Energy prices dropped for the second month in a row, offsetting other price increases
Monthly change in overall consumer prices
Medical care contributed most to other inflation in August
Overall prices up 0.1% from July
Energy prices dropped two months in a row, offsetting other price increases
Monthly change in overall consumer prices
Medical care contributed most to other inflation in August
Overall prices up 0.1% from July
Energy prices dropped two months in a row, offsetting other price increases
Monthly change in overall consumer prices
Energy prices dropped for the second month in a row, offsetting other price increases
Overall prices up 0.1% from July
Fuel prices have pulled back from their summer highs but remain elevated compared with the year before. The overall monthly inflation numbers, however, hide an alarming trend: Falling gas prices conceal increases in other costs.
Gas prices fell in July and August after spiking dramatically following Russia’s invasion of Ukraine. At the same time, the cost of groceries continued to rise, especially dairy, cereals and baked goods. A tight housing market kept rent moving upward. Increases in those and other costs completely offset the drop from gas prices.
Food prices are still rising. Here’s how Americans are coping
Return to menu
Inflation is strangling kitchen-table budgets across the United States. Food costs have climbed every month this year. Groceries are 12.2 percent higher now than they were last summer — the biggest year-over-year spike in 43 years, federal data shows. Fruits and vegetables cost 8 percent more, staples such as bread and cereal have jumped 14 percent, and butter and margarine are up a whopping 26 percent.
That’s forced many consumers to make different choices in the grocery aisles. The Washington Post asked readers to share how they’ve adjusted, especially as decades-high inflation has also raised most other living costs. Whether they’re going with store brands, cutting back or simply doing without, all are making clear changes in the way they shop for food.
Powell: No painless way to get rid of inflation
Return to menu
In August, Federal Reserve Chair Jerome H. Powell said that wrestling inflation would cause “some pain” for households and businesses.
The central bank chief repeated that message Wednesday, saying that there are few ways for the Fed to slow the economy significantly without costly trade-offs.
“We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t,” Powell said at a news conference.
In their latest crop of economic projections, Fed officials gave some insight into what that pain might look like. Policymakers expect the unemployment rate could rise to 4.4 percent next year, up from the current 3.7 percent. Generally, a rise of half a percentage point or more in the unemployment rate has also been a sign of a recession.
Fed’s latest hike probably means even higher mortgage rates
Return to menu
The Federal Reserve’s move to raise rates again Wednesday could mean even higher mortgage rates in the coming weeks.
Borrowing costs have already doubled in the past nine months as the central bank takes aggressive action to slow inflation. The interest rate for a 30-year fixed mortgage, the most popular home loan, spiked above 6 percent last week for the first time in 14 years, according to data from Freddie Mac.
Mortgage rates surpass 6 percent for the first time since 2008
Although the latest rate hike probably won’t immediately affect mortgages — housing experts say lenders had already raised rates for loans in anticipation of the Fed’s latest move — there are likely to be ripple effects down the line. The central bank influences borrowing costs across the economy by controlling the federal funds rate, which is the interest rate banks use to lend money to each other overnight. That rate, currently between 3 percent and 3.25 percent, is at a 14-year high — and the Fed is pushing it higher.
The Fed’s economic projections are vital, yet rarely on target
Return to menu
Along with its interest rate announcement, the Fed today will release its quarterly summary of economic projections, a map to policymakers’ expectations for the road ahead.
Investors pore over these forecasts, the most authoritative public indications of Fed officials’ thinking, in hopes of unearthing clues about future monetary policy decisions.
There’s just one problem: The Fed forecasts are often wrong.
In December 2021, for example, the median Fed official’s projection called for the central bank’s preferred measure of inflation — the personal consumption expenditures (PCE) index — to rise by 2.6 percent this year.
Federal Reserve joins scores of other central banks in raising rates
Return to menu
The expected Federal Reserve rate hike is part of a broad trend that is making credit more expensive throughout the global economy.
Over the past two months, central banks have enacted more jumbo rate hikes of at least three-quarters of a point than ever before, according to Citigroup.
The Fed is among at least eight central banks expected to raise borrowing costs this week, aiming to vanquish the inflationary pressures that have accompanied the resumption of pre-pandemic activities. On Tuesday, Sweden’s Riksbank raised rates by a full point and said additional increases would follow.
Revenge of the savers: Fed rate rises offer boon to the cautious
Return to menu
The Federal Reserve’s four rate increases this year and Wednesday’s upcoming fifth increase have been major factors in sending both stocks and bonds into bear markets.
However, tens of millions of people are getting a little-recognized benefit from these rate increases. I’m talking about people who own money market mutual funds, whose assets consist of high-quality, short-term IOUs from the federal government, banks and other financial institutions.
The interest that holders of these funds are getting these days is more than 100 times — or 10,000 percent — above what they were earning at the end of last year.
Check what the housing market is like in your area on our map
Return to menu
After spiraling to new heights during the pandemic, the housing market is finally starting to cool. Data on how fast homes have sold over the past decade shows how the market took off in the summer of 2020 and began to wind back down this spring.
“Affordability challenges are the main driver of the housing slowdown,” said Jeff Tucker, senior economist at Zillow.
Buyers are pulling back from the market as monthly mortgage payments climb out of reach for many households, driven by rising interest rates and record prices. In turn, that’s putting pressure on sellers to cut their prices, accept lower offers or rent their homes rather than list them for sale. Both buyers and sellers are expressing uncertainty about where home values will settle.
Why does the Fed raise interest rates?
Return to menu
The Fed is about to hike interest rates for the fifth time since March. Why are bank officials doing that, and what influence do higher rates have on the economy?
Despite signs of cooling, labor market remains pillar of strength
Return to menu
The labor market has remained a bright spot in the economy, despite growing concerns that the Fed’s interest rate hikes could spark a recession. The United States added 315,000 jobs last month — far fewer than in July but an indication that at least for now, American workers continue to be flush with employment opportunities. There are nearly two job openings for every job seeker.
The combination of a tight labor market and widespread worker shortages have helped fuel the ongoing wave of labor activism. Last week, 57,000 railroad workers threatened to strike over staffing-related concerns, in a shutdown that would have paralyzed much of the U.S. economy, and 15,000 nurses walked off the job in Minnesota to protest being overworked.
What causes a recession?
Return to menu
Everyone is wondering whether the economy is going into a recession or whether we’re already in one.
But what causes a recession?
A recession is caused when a chain of events picks up momentum, like a line of dominoes, and does not stop until the economy shrinks. Each event is connected to something that happened before and something that will happen in the future. If the price of a hamburger goes up, you might stop buying hamburgers. This would affect a restaurant, and that would affect a server. There are many interconnected chains like this throughout the economy.
Inflation is still high, but Americans are feeling better
Return to menu
The Fed has been aggressively hiking interest rates this year in hopes of eventually cooling the economy enough to tame rapidly rising prices.
While that hasn’t quite happened yet, there is one bit of good news for the central bank: Americans expectations for where inflation will be a year from now have been coming down.
Median inflation expectations for the next year fell to 4.6 percent, the lowest reading since last September, in the latest results from the University of Michigan’s closely-watched consumer sentiment survey, released Friday. Long-term, Americans now expect inflation to settle at 2.8 percent, marking a 14-month low.