US recession a growing fear as Fed plans to keep rates high
WASHINGTON
After scaling 40-year highs, inflation in the United States has been slowly easing since summer.
Yet the Federal Reserve seems decidedly unimpressed — and unconvinced that its fight against accelerating prices is anywhere near over.
The Fed on Dec. 14 raised its benchmark interest rate for the seventh time this year. The half-point hike the Fed announced — to a range of 4.25 percent to 4.5 percent — had been widely expected.
What spooked investors was Wall Street’s growing understanding of how much further the Fed seems willing to go to defeat high inflation.
The Fed’s policymakers forecast that they will ratchet up their key rate by an additional three-quarters of a point — to a hefty 5 percent to 5.25 percent — and keep it there through 2023.
Some Fed watchers had expected only an additional half-point in rate hikes. Those higher rates will mean costlier borrowing costs for consumers and companies, ranging from mortgages to auto and business loans.
The policymakers also downgraded their outlook for economic growth in 2023 from the 1.2 percent they had forecast in September to a puny 0.5 percent — as near to a recession forecast as they were likely to make.
What’s more, they raised their expectation for the unemployment rate next year to 4.6 percent from 3.7 percent now.
All of which suggested that the officials expect an economic downturn as the price of taming inflation.
The message the Fed was sending, said Ryan Sweet, chief U.S. economist at Oxford Economics, was blunt: “We’re going to break something. We’re going to break inflation or we’re going to break the economy.’’
Many investors had convinced themselves that with inflation pressures gradually easing, the Fed might soon declare some progress in their fight and perhaps even reverse course and cut rates sometime in 2023.
Yet Fed Chair Jerome Powell, who had been slow to recognize the inflation threat when it emerged in the spring of 2021, was in no mood to celebrate.
“But we need to be honest with ourselves... 12-month core inflation is 6 percent’’ he told reporters on Dec. 14.
The policymakers increased their inflation forecast for next year above what they were expecting back in September.
It suggested that they feel their anti-inflation fight isn’t having as much impact as they had hoped. Many economists were caught off-guard by that change.
Sweet of Oxford Economics said he suspects that “the Fed is overstating how strong inflation might be.’’ But he said he sympathized with its predicament: Powell and the other policymakers fear that a failure to curb high inflation — even if it means a recession next year — would lead to a central bank’s nightmare scenario: “stagflation.”
“Faced with that choice,” Sweet said, “they’ll do everything they can to prevent it.”
