Fed’s next move may tell how much ‘pain’ possible

Central bank expected to raise benchmark rate to its highest level in 14 years

WASHINGTON — Federal Reserve Chair Jerome Powell warned in a speech last month that the Fed’s drive to curb inflation by aggressively raising interest rates would “bring some pain.”

On Wednesday, Americans may get a better sense of how much pain could be in store.

The Fed is expected at its latest meeting to raise its key short-term rate by three-quarters of a point for the third consecutive time. Another hike that large would lift its benchmark rate — which affects many consumer and business loans — to a range of 3% to 3.25%, the highest level in 14 years.

In a further sign of the Fed’s deepening concern about inflation, it will also likely signal that it plans to raise rates much higher by year’s end than it had forecast three months ago — and to keep them higher for a longer period.

Economists expect Fed officials to forecast that their key rate could go as high as 4% by the end of this year. They’re also likely to signal additional increases in 2023, perhaps to as high as 4.5%.

Short-term rates at that level would make a recession likelier next year by sharply raising the cost of mortgages, car loans and business loans. The Fed intends those higher borrowing costs to slow growth by cooling off a still-robust job market to cap wage growth and other inflation pressures. Yet the risk is growing that the Fed may weaken the economy so much as to cause a downturn that would produce job losses.

The U.S. economy hasn’t seen rates as high as the Fed is projecting since before the 2008 financial crisis. Last week, the average fixed mortgage rate topped 6%, its highest point in 14 years. Credit card borrowing costs have reached their highest level since 1996, according to Bankrate.com.

Powell and other Fed officials say the Fed’s goal is to achieve a so-called soft landing, by which they would slow growth enough to tame inflation but not so much as to trigger a recession.

By last week, though, that goal appeared further out of reach after the government reported that inflation over the past year was 8.3%. Even worse, so-called core prices, which exclude the volatile food and energy categories, rose much faster than expected.

The inflation report also documented just how broadly inflation has spread through the economy, complicating the Fed’s anti-inflation efforts. Inflation now appears increasingly fueled by higher wages and by consumers’ steady desire to spend and less by the supply shortages that had bedeviled the economy during the pandemic recession.

“They’re going try to avoid recession,” said William Dudley, formerly the president of the Federal Reserve Bank of New York. “They’re going to try to achieve a soft landing. The problem is that the room to do that is virtually nonexistent at this point.”

At a previous news conference in June, Powell had noted that a three-quarter-point rate hike was “an unusually large one” and suggested that “I do not expect moves of this size to be common.”