Inflation dims plan for `soft landing'

Some economists think rates may be raised 3/4 of a point

For months, Chair Jerome Powell has held out hope that the Federal Reserve will be able to raise interest rates high enough to throttle rampant inflation without tipping the economy into recession.

Yet with the Fed set to announce another sharp interest rate hike after it meets this week, days after the government issued a scorching inflation report, the likelihood that the central bank can engineer a so-called “soft landing” appears to be dimming.

With inflation at a four-decade high of 8.6%, Fed officials are likely this year to boost borrowing rates even higher than was expected just weeks ago. The central bank may also signal, when its policy meeting ends Wednesday, the possibility of raising rates to a level that could weaken growth — elevating the risk of a recession.

Some economists now even think the Fed may decide to surprise the financial markets this week by raising its benchmark short-term rate by three-quarters of a point, for the first time since 1994, rather than the half-point that Powell had signaled last month. Wall Street traders have priced in a 30% likelihood of such a drastic move, according to the CME Group.

Even if an economic downturn can be avoided, it's almost inevitable, analysts say, that the Fed will have to inflict some pain — most likely in the form of higher unemployment — as the price of defeating stubbornly high inflation.

“They need to accept the fact that you can't fight inflation without imposing some pain on the markets and the economy,” said Ethan Harris, head of global economic research at Bank of America. “They shouldn't coddle the markets by kind of implying that there's no major issue here, we're going to have a soft landing for the economy, I think it's too late for that. We have to have a hard landing.”

The prospect that the Fed will accelerate its credit tightening, further raising borrowing costs for households and businesses, drove the stock market sharply lower Monday. The broad S&P 500 index fell into bear-market territory, having lost more than 20% of its value since its peak at the beginning of the year.

Fed officials, as a group, were slow last year to recognize how persistent inflation would be,