“What’s really going to matter from this meeting is what is signaled about the next four months,” said Michael Strain, director of economic policy studies at the right-leaning American Enterprise Institute. “Should we be expecting a longer pause? … How long was the pause going to be in the first place? It feels like we may already be shifting the parameters of the tightening cycle. But we’re supposed to be evaluating that against a totally vague and unclear baseline.”
The Fed has already hiked rates five times this year — the last three at 0.75 percentage points, which used to be considered unusually steep. The bank is moving at a level of intensity not seen in decades. Yet that fight is drawing increasing criticism, from economists and lawmakers, that the Fed is overcorrecting. Rate hikes take months to fully sink into the economy, and the growing fear is that the Fed will outrun its ability to gauge whether its policies are working. Even if the bank stopped raising rates, decisions its leaders have already made could arrive with a thud next year and roil the global financial system along the way.
Fed officials will announce their interest rate decision at 2 p.m. Eastern time at the conclusion of their two-day policy meeting. At 2:30 p.m., Federal Reserve Chair Jerome H. Powell will hold a news conference where he will face questions on the outlook for inflation, the labor market, risks of a recession and future rate hikes. The Fed’s own projections show a possible hike of half a percentage point at the next meeting in December, followed by a smaller hike in early 2023. Powell will probably be pressed on how policymakers will arrive at those decisions, especially since inflation remains stubbornly high.
Central bankers often say in public remarks that they need to see clear and consistent evidence that inflation is falling and becoming less entrenched in Americans’ lives before they change course. But they have yet to see anything near that kind of progress. Prices in September rose 8.2 percent compared with the year before, and 0.4 percent compared with August, more than analysts’ expectations. Core inflation, a measure closely watched by the Fed that strips out more volatile categories such as food and energy, also came in hot.
Wednesday’s expected hike would bring the Fed’s policy rate, known as the federal funds rate, to between 3.75 and 4 percent. That’s considered “restrictive territory,” where interest rates directly slow the economy by making all kinds of borrowing more expensive, from mortgages to business loans. Economists and Fed watchers also note that the Fed’s decisions are also amplified as central banks around the world hike rates to tame inflation, a precarious experiment that could soon send the global economy into a recession.
“We are very aware of what’s going on in other economies around the world and what that means for us, and vice versa,” Powell said when the Fed raised rates in September. “The forecasts that we put together, that our staff puts together, and that we put together on our own always try to take all of that into account.”
Compounding the challenge is that interest rates are blunt and only target demand in the economy. They cannot do anything to fix bungled supply chains, calm oil markets or bring people back into the workforce. Some sectors are extremely sensitive to interest rates; the housing market has significantly slowed as mortgage rates soar to 7 percent. But Powell will need to explain how he expects the Fed’s moves to start working in other sectors, too.
Through it all, the job market remains remarkably resilient and is still churning. The unemployment rate is low at 3.5 percent, and employers are still eager to hire new workers, with the number of job openings rising in September to 10.7 million. Still, that’s the opposite of what Fed officials want to see, since they argue that they can engineer a “soft landing” if companies eliminate vacant jobs rather than laying people off.
Outside the Fed, inflation has become a major issue for voters and candidates ahead of the midterm elections. Republicans have hammered Democrats for their sprawling stimulus aid earlier in the pandemic that helped supercharged demand and sent inflation on the upswing. Democrats, meanwhile, defend their policies as breathing new life into the labor market.
The Fed closely guards its independence from politics and makes decisions regardless of which party holds Congress or the White House. But Democrats on Capitol Hill have recently ramped up their criticism of the central bank, arguing that such massive rate hikes will inevitably hurt the labor market. On Monday, 11 lawmakers, including Sens. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.), issued a letter to Powell warning that the Fed against inflicting needless harm.
“We are deeply concerned that your interest rate hikes risk slowing the economy to a crawl while failing to slow rising prices that continue to harm families,” the letter read.