Interest rates and a cloudy economic picture to sideline the Federal Reserve

WASHINGTON (AP) — The Federal Reserve is poised to adjust its key interest rate on Wednesday as the central bank faces an economy that has proven resilient, but is under pressure from rising interest rates, overseas volatility and anxious investors.

American economic growth It rose in the July-September quarter Against a backdrop of strong consumer spending and inflation Last month showed signs of an uncomfortably high. Chairman Jerome Powell will want to ensure the economy cools and inflation resumes its descent, signaling any slowing of the Fed’s drive to reduce inflation to its 2% target.

At the same time, volatile financial markets have risen Long-term rates on US Treasurys, pushing stock prices lower and corporate debt costs higher. Powell and other central bank policymakers say they think those trends could contribute to an economic slowdown — and, without the need for more rate hikes, ease inflationary pressures.

From March 2022, the central bank has raised its key rate from zero to about 5.4% in an effort to control inflation, reaching a four-decade high in 2020 as the economy roared out of the pandemic recession. Mortgages, auto loans and credit card debt have all risen in response. Annual inflation, as measured by the government’s Consumer Price Index, eased to 3.7% from a peak of 9.1% in June last year.

Economists at Wall Street banks estimate that sharp losses in stock and bond markets over the past few months could have a dampening effect on the economy equivalent to the impact of three or four quarter-point rate hikes by the central bank.

See also  Sophia Smith leads the USWNT past Vietnam in its Women's World Cup opener.

“It’s clearly a tightening of financial conditions,” Powell said this month. “That’s what we’re trying to achieve.”

Although the central bank raised its benchmark rate to a 22-year high, it has not imposed any hike since July. Even so, the yield — or interest rate — on the 10-year Treasury note has been rising, reaching 5% last week, a level not reached in 16 years. The rise in Treasury yields has pushed the average 30-year fixed mortgage rate to nearly 8% and has also pushed up the costs of credit cards, auto loans and many types of business loans.

Market analysts say several factors have come together to drive up Treasury yields. For one thing, even as the Fed shrinks its bonds, the government is still expected to sell trillions of dollars in bonds to finance large and persistent budget deficits in the coming years. As a result, higher Treasury rates may be needed to attract more buyers.

And with the future path of rates looking murkier than usual, investors are demanding higher yields in exchange for the higher risk of holding long-dated bonds.

What matters to the Fed is that the yield on the 10-year Treasury has continued to rise even without Fed rate hikes. While the central bank has kept its own benchmark rate on hold, it suggests that Treasury yields will remain unusually high. Many business and consumer credit rates will help keep a lid on economic growth and inflation, which in turn will remain high.

According to the CME FedWatch tool, Wall Street traders expect a 98% probability the Fed will leave it unchanged on Wednesday. They see only a 24% chance of a rate hike at the central bank’s next meeting in December.

See also  Weekly jobless claims rose to 231,000, the most since August.

Powell and other policymakers hope to continue progressing toward a so-called soft landing, in which they succeed in reducing inflation to 2% without triggering a deep recession.

However, inflation has fallen from its peak Hiring is strong, Consumers spend freely And the economy is growing at a solid pace, leading to confusing expectations among many economists that a recession is necessary to make much progress.

“The story of the year so far,” wrote economists at Goldman Sachs, “is that the economic recovery has not prevented further … progress in the fight against inflation.”

Yet improving those traditional relationships remains a challenge for central bank policymakers. They continue without much guidance from their workhorse economic model, now known as the Phillips Curve. Under that economic model, beating inflation usually requires high unemployment and slow growth — even recession.

Alan Blinder, a Princeton University economist who was the Fed’s vice chairman from 1994-1996, said last week that those relationships had been improved by Covid-19, leaving the Fed with less clear guidance for setting policy.

“The pandemic has changed everything,” he said.

At the Fed in the 1990s, Blinder said, “we leaned” on the Phillips curve in assessing inflationary trends. “It’s a big difference between then and now.”

Blinder spoke to The Associated Press in Washington before receiving the American Academy of Political and Social Sciences’ Lifetime Service Award.

Leave a Reply

Your email address will not be published. Required fields are marked *