Fed’s aggressive rate hikes raise likelihood of a recession

Jun 15, 2022, 9:01 PM | Updated: Jun 17, 2022, 5:23 am
Federal Reserve Chairman Jerome Powell news conference is displayed on televisions while traders wo...

Federal Reserve Chairman Jerome Powell news conference is displayed on televisions while traders work on the floor at the New York Stock Exchange in New York, Wednesday, June 15, 2022. The Federal Reserve on Wednesday intensified its drive to tame high inflation by raising its key interest rate by three-quarters of a point — its largest hike in nearly three decades — and signaling more large rate increases to come that would raise the risk of another recession. (AP Photo/Seth Wenig)

(AP Photo/Seth Wenig)

WASHINGTON (AP) — Federal Reserve Chair Jerome Powell has pledged to do whatever it takes to curb inflation, now raging at a four-decade high and defying the Fed’s efforts so far to tame it.

Increasingly, it seems, doing so might require the one painful thing the Fed has sought to avoid: A recession.

A worse-than-expected inflation report for May — consumer prices rocketed up 8.6% from a year earlier, the biggest jump since 1981 — helped spur the Fed to raise its benchmark interest rate by three-quarters of point Wednesday.

Not since 1994 has the central bank raised its key rate by that much all at once. And until Friday’s nasty inflation report, traders and economists had expected a rate hike of just half a percentage point Wednesday. What’s more, several more hikes are coming.

The “soft landing” the Fed has hoped to achieve — slowing inflation to its 2% goal without derailing the economy — is becoming both trickier and riskier than Powell had bargained for. Each rate hike means higher borrowing costs for consumers and businesses. And each time would-be borrowers find loan rates prohibitively expensive, the resulting drop in spending weakens confidence, job growth and overall economic vigor.

“There’s a path for us to get there,” Powell said Wednesday, referring to a soft landing. “It’s not getting easier. It’s getting more challenging”

It was always going to tough: The Fed hasn’t managed to engineer a soft landing since the mid-1990s. And Powell’s Fed, which was slow to recognize the depth of the inflation threat, is now having to play catch-up with an aggressive series of rate increases.

“They are telling you: ‘We will do whatever it takes to bring inflation to 2%,’ ” said Simona Mocuta, chief economist at State Street Global Advisors. “I hope the (inflation) data won’t require them to do whatever they’re willing to do. There will be a cost.”

In Mocuta’s view, the risk of a recession is now probably 50-50.

“It’s not like there’s no way you can avoid it,” she said. “But it’s going to be hard to avoid it.”

The Fed itself acknowledges that higher rates will inflict some damage, though it doesn’t foresee a recession: On Wednesday, the Fed predicted that the economy will grow about 1.7% this year, a sharp downgrade from the 2.8% growth it had forecast in March. And it expects unemployment to average a still-low 3.7% at year’s end.

But speaking at a news conference Wednesday, Powell rejected any notion that the Fed must inevitably cause a recession as the price of taming inflation.

“We’re not trying to induce a recession,” he said. “Let’s be clear about that.”

President Joe Biden told The Associated Press on Thursday that he also believes a recession in the United States is not inevitable. The U.S. is in a better position than any other nation to tame inflation, he said.

Economic history suggests, though, that aggressive, growth-killing rate hikes could be necessary to finally control inflation. And typically, that is a prescription for a recession.

Indeed, since 1955 every time inflation ran hotter than 4% and unemployment fell below 5%, the economy has tumbled into recession within two years, according to a paper published this year by former Treasury Secretary Lawrence Summers and his Harvard University colleague Alex Domash. The U.S. jobless rate is now 3.6%, and inflation has topped 8% every month since March.

Inflation in the United States, which had been under control since the early 1980s, resurged with a vengeance just over a year ago, largely a consequence of the economy’s unexpectedly robust recovery from the pandemic recession. The rebound caught businesses by surprise and led to shortages, delayed shipments — and higher prices.

President Joe Biden’s $1.9 trillion stimulus program added heat in March 2021 to an economy that was already warmed up. So did the Fed’s decision to continue the easy-money policies — keeping short-term rates at zero and pumping money into the economy by buying bonds — it had adopted two years ago to guide the economy through the pandemic.

Only three months ago did the Fed start raising rates. By May, Powell was promising to keep raising rates until the Fed sees “clear and convincing evidence that inflation is coming down.”

Some of the factors that drove the economy’s recovery have meanwhile vanished. Federal relief payments are long gone. Americans’ savings, swelled by government stimulus checks, are back below pre-pandemic levels.

And inflation itself has been devouring Americans’ purchasing power, leaving them less to spend in shops and online: After adjusting for higher prices, average hourly wages fell 3% last month from a year earlier, the 14th straight drop. On Wednesday, the government reported that retail sales fell 0.3% in May, the first drop since December.

Now, rising rates will squeeze the economy even harder. Buyers or homes and autos will absorb higher borrowing costs, and some will delay or scale back their purchases. Businesses will pay more to borrow, too.

And there’s another byproduct of Fed rate hikes: The dollar will likely rise as investors buy U.S. Treasurys to capitalize on higher yields. A rising dollar hurts U.S. companies and the economy by making American products costlier and harder to sell overseas. On the other hand, it makes imports cheaper in the United States, thereby helping ease some inflationary pressures.

The U.S. economy still has strength. The job market is booming. Employers have added an average 545,000 jobs a month over the past year. Unemployment is near a 50-year low. And there are now roughly two job openings for every jobless American.

Families aren’t buried in debts as they were before the Great Recession of 2007-2009. Nor have banks and other lenders piled up risky loans as they had back then.

Still, Robert Tipp, chief investment strategist at PGIM Fixed Income, said that recession risks are rising, and not only because of the Fed’s rate hikes. The growing fear is that inflation is so intractable that it might be conquered only through aggressive rate hikes that imperil the economy.

“The risk is up,” Tipp said, “because the inflation numbers came in so high, so strong.”

All of which makes the Fed’s inflation-taming, recession-avoiding act even more treacherous.

“It’s going to be a tightrope walk,” said Thomas Garretson, senior portfolio strategist at RBC Wealth Management. “It’s not going to be easy.”

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

AP

Associated Press

Kerry: Despite setbacks at home, US to make climate goals

WASHINGTON (AP) — U.S. climate envoy John Kerry said Friday that setbacks for President Joe Biden’s climate efforts at home have “slowed the pace” of some of the commitments from other countries to cut climate-wrecking fossil fuels, but he insisted the U.S. would still achieve its own ambitious climate goals in time. Kerry spoke to […]
16 hours ago
A WWII ear landing craft used to transport troops or tanks was revealed on the shoreline near the L...
Associated Press

World War II-era boat emerges from shrinking Lake Mead

A sunken boat dating back to World War II is the latest object to emerge from a shrinking reservoir that straddles Nevada and Arizona.
16 hours ago
This image provided by the Texas Department of Criminal Justice shows Texas death row inmate Ramiro...
Associated Press

Texas inmate asks to delay execution for kidney donation

HOUSTON (AP) — A Texas inmate who is set to be put to death in less than two weeks asked that his execution be delayed so he can donate a kidney. Ramiro Gonzales is scheduled to receive a lethal injection on July 13 for fatally shooting 18-year-old Bridget Townsend, a southwest Texas woman whose remains […]
16 hours ago
FILE - A truck arrives at the Amazon warehouse facility on the Staten Island borough of New York, A...
Associated Press

Amazon bars off-duty warehouse workers from its buildings

Amazon is barring off-duty warehouse workers from the company’s facilities, a move organizers say can hamper union drives. Under the policy shared with workers on Amazon’s internal app, employees are barred from accessing buildings or other working areas on their scheduled days off, and before or after their shifts. An Amazon spokesperson said the policy […]
16 hours ago
Associated Press

Mexican president: New refinery is ‘a dream come true’

MEXICO CITY (AP) — The office of Mexican President Andrés Manuel López Obrador said Friday that the country’s new Gulf coast refinery is “a dream come true.” López Obrador “inaugurated” the partially finished Olmeca refinery in Dos Bocas, a city in his home state of Tabasco. The project, when finished, is expected to cost as […]
16 hours ago
FILE - Fulton County District Attorney Fani Willis speaks during an interview at her office, Feb. 2...
Associated Press

Judge mulls rules for lawmaker special grand jury questions

ATLANTA (AP) — A judge is considering what guidelines to place on questions that can be asked of Georgia state lawmakers called before a special grand jury in an investigation into whether former President Donald Trump and others illegally tried to influence the 2020 election in the state. Lawyers representing a former state lawmaker and […]
16 hours ago

Sponsored Articles

...
Dr. Richard Carmona

Great news: Children under 5 can now get COVID-19 vaccine

After more than two years of battle with an invisible killer, we can now vaccinate the youngest among us against COVID-19. This is great news.
...
Day & Night Air Conditioning, Heating and Plumbing

Most plumbing problems can be fixed with regular maintenance

Instead of waiting for a problem to happen, experts suggest getting a head start on your plumbing maintenance.
...
Christina O’Haver

BE FAST to spot a stroke

Every 40 seconds—that’s how often someone has a stroke in the United States. It’s the fifth leading cause of death among Americans, with someone dying of a stroke every 3.5 minutes.
Fed’s aggressive rate hikes raise likelihood of a recession