US Federal Reserve officials gave their clearest signal yet that they are willing to tolerate a recession as a necessary trade-off for regaining control of inflation.
Policymakers, criticized for being too late to realize the scale of the US inflation problem, are moving aggressively to catch up. They raised interest rates by 75 basis points on Wednesday for the third time in a row, and forecast a further 1.25 percentage points of tightening before the end of the year.
That was more hawkish than expected by economists.
Additionally, Fed officials cut growth projections and raised their unemployment outlook, while Fed Chair Jerome Powell spoke of the painful slowdown that is needed to curb price pressures running at the highest levels since the 1980s.
Fed officials are not explicitly projecting a recession, but Powell’s rhetoric about the rate hikes likely causing pain for workers and businesses has become progressively sharper in recent months.
At a news conference on Wednesday, Powell said that a soft landing with only a small increase in joblessness would be “very challenging.”
“No one knows whether this process will lead to a recession or if so, how significant that recession would be,” Powell told reporters after officials lifted the target range for their benchmark rate to between 3 percent and 3.25 percent.
“The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer. Nonetheless, we’re committed to getting inflation back down to 2 percent,” he said.
The median unemployment forecast among the 19 Fed officials is for 4.4 percent next year, remaining there through 2024, compared with the current rate of 3.7 percent.
However, even that new level might still be too low. Almost all participants said risks to their new forecasts were weighted to the upside. They projected interest rates reaching 4.4 percent this year and 4.6 percent next year, before moderating to 3.9 percent in 2024.
“We have always understood that restoring price stability while achieving a relatively modest increase in unemployment and a soft landing would be very challenging,” Powell said. “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.”
Fed officials’ apprehension about their ability to bring down inflation is also evident in other projections. Even amid a new rate-hike path, officials still predict that inflation would not ease to their 2 percent target until 2025.
Powell told reporters several times that a softer labor market might be necessary to sufficiently bring down demand, but he also pointed to higher savings rates and more money at the state level indicating that the economy is still reasonably strong, a “good thing” that he said would make it more resistant to a significant downturn.
A number of economists raised their forecasts on Wednesday for where Fed rates would peak.
Bank of America Corp predicts rate hikes of 75 basis points in November, 50 basis points in December and two quarter-point increases early next year, bringing the benchmark rate to a target range of 4.75 percent to 5 percent. Economists at Societe Generale SA are calling for a “mild recession” in early 2024. Goldman Sachs Group Inc economists raised their forecast for the pace of Fed hikes.
Amherst Pierpont Securities LLC chief economist Stephen Stanley increased his terminal-rate outlook to 5.25 percent, saying he does not think the Fed’s inflation forecasts are realistic, and it will take increased tightening to bring price growth down.
“I see the first half of next year as a treacherous time for the Fed,” Stanley wrote in a note.
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