The Fed won't curb inflation after six interest rate hikes in 2022

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Why 6 interest rate hikes in a row isn’t enough for the Fed to curb inflation

The Federal Reserve has raised interest rates again, its fourth straight hike of 0.75 percent and its sixth hike of the year — and it may not be the last.

And while the Fed hasn’t said where rates would end up ultimately, Federal Reserve Chairman Jerome Powell said Wednesday in his press conference that “the incoming data since our last meeting suggests ultimate level of interest rates will be higher.” In other words, rates could reach 5 percent sometime next year, surpassing the 4.6 percent the Fed projected in September.

This latest increase announced on Wednesday brings the federal funds rate to the highest level since 2008. Ultimately, that means trillions of dollars of lending, from car loans to mortgages to business lending, will get even more expensive.

While some aspects of the economy remain robust — namely hiring — others have been hammered by the steady increase in interest rate hikes. The most notable is the housing market, where 30-year mortgage rates surpassed 7 percent, the highest since the early 2000s. Housing sales have plummeted with the rate of existing home sales falling by almost a quarter so far this year. The rate of new home construction has fallen by about a fifth since April.

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All this leads many to wonder, if the rate hikes are having little effect, so far, on inflation, when will the hikes stop? One explanation for the increasingly severe hikes and persistently high inflation is that monetary policy — in this case, interest rate hikes — has “long and variable lags,” meaning it’s hard to predict when it will begin to affect the “real economy” (businesses making hiring and investment decisions, individuals making purchasing decisions), even if some effects — like on the stock market — happen quite quickly.

These lags are why many forecasters and analysts are anticipating a recession, but only sometime next year, after which the Fed will have been at work on tightening up the economy for as much as a year.

“That time is coming, and it may come as soon as the next meeting or the one after that,” Powell said in his press conference following the rate announcement.

But that’s not the whole economic story

The Federal Reserve has made it clear that it wants to slow down wage growth and cool down the hot, pandemic-era labor market. While hiring has slowed down, employers are adding employees at a rate that, before the pandemic, would be quite high. And job openings, a statistic that the Federal Reserve is watching as a sign of how tight the labor market is, are back at two per every unemployed worker. The Fed has tried to drive that number down, but it has stayed persistently high.

But the Federal Reserve still thinks rate hikes will bring down inflation — eventually. When it last released its economic projections in September, the Fed foresaw that inflation would return to near 2 percent by 2024 and that unemployment would peak at 4.4 percent by 2024, up a point (and about 1 million workers) from its current 3.5 percent. But at the moment, inflation remains stubbornly high, and while it’s moderated somewhat from earlier in the year, it’s still running at rates not seen since the early 1980s.

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The Fed is facing criticism, largely from the left, for its aggressive rate-hiking. Sen. John Hickenlooper (D-Colo.) called on the Fed to pause rate hikes in a letter last week, while Sen. Sherrod Brown (D-Ohio), wrote a letter to Powell, reminding him that “you must not lose sight of your responsibility to ensure that we have full employment.”

But President Joe Biden, who reappointed Powell to the role of Fed chair last year, has yet to receive criticism from the White House, even as he dramatically hikes rates so soon before an election. The Fed is united around his policy — there were no dissents, even from members of the Federal Open Market Committee appointed by the current president.

Thanks to Alicia Benjamin for copy editing this article.

  • Matthew Zeitlin
    Matthew Zeitlin

    Domestic Economics Reporter

    Matthew Zeitlin is an economics reporter at Grid focused on the domestic impact of major stories such as coronavirus, the supply chain and economic volatility.