The Federal Reserve may reach a turning point this week when it announces what is expected to be another substantial three-quarter point hike in its key interest rate, the fourth in a row.
Fed officials are likely to engage in a tense debate over whether it will soon be time to rein in their rate hikes, which are intended to cool the worst inflation in four decades but also raise the risk of a recession.
At a news conference on Wednesday after the latest Fed meeting, Chairman Jerome Powell could signal an upcoming shift to smaller rate hikes. Doing so would give officials time to assess the impact of the hikes.
Powell won’t explicitly detail the Fed’s likely next moves. But economists say he could acknowledge that officials are discussing a shift down to a half-point rate hike in December. The Fed’s increases have already led to much more expensive lending rates, ranging from mortgages to auto and business loans.
Those higher borrowing costs have weakened the domestic market, in particular. The average rate on a 30-year fixed-rate mortgage, which was just 3.14% a year ago, topped 7% last week for the first time since 2002, mortgage buyer Freddie Mac reported. Home Sales used have fallen for eight consecutive months.
Fed officials have stressed that they need to raise rates significantly to rein in inflation, which has caused hardship for millions of households. High inflation has also become a central point of attack for Republicans against Democrats in midterm congressional elections.
However, some economists have said the Fed should soon consider cutting the fastest pace of rate hikes since the early 1980s.
“It’s time to think about calibrating these rate hikes,” said Diane Swonk, chief economist at KPMG. As the Fed gets closer to finishing its rate hikes, she said, “it makes sense not to hit the brakes so hard.”
The Fed’s short-term reference rate is in a range of 3% to 3.25%. In September, policymakers forecast they would raise it an additional 1.25 percentage points by the end of the year. That timetable suggests a three-quarter point increase on Wednesday and a half point increase in December.
One concern for the Fed is that if it suggests it might ease its credit squeeze, financial markets could conclude that it will soon stop raising rates altogether and perhaps cut them next year. Stock and bond prices would rise, offsetting the Fed’s efforts to slow the economy.
[Con información de The Associated Press]
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