Economic Contraction

Fed poised for another big rate hike with economy on edge

Higher lending costs make it more expensive to borrow funds to buy cars and homes or expand businesses, which should dampen demand, while making it more attractive to save rather than spend.

Other major central banks have followed suit, including the European Central Bank which took its first step last week.

Fed Chairman Jerome Powell said last month that the Federal Open Market Committee was looking at a 50 or 75 basis point hike at the July meeting, and most economists are expecting a hike. repeat of June’s three-quarter point increase.

Fed Governor Christopher Waller recently floated the idea of ​​a mammoth 100 basis point hike, which would be the first since the US central bank began using the federal funds rate for policy at the start. of the 1990s.

The equivalent amount of tightening in one move has not been seen since the early 1980s, when then-Fed chief Paul Volcker was on a crusade to crush an inflationary spiral in wages and prices.


But even Waller noted that it’s important not to go too fast, and a full point hike would only be necessary if the data continues to show accelerating price increases.

“I think they’ll probably be discussing 100 basis points just because the inflation picture is still very bad,” said Julie Smith, an economics professor at Lafayette College.

But some recent data “indicates that previous rate increases have most likely started to work,” she said in an interview.

House prices have soared, repeatedly hitting new highs, even as interest rates have risen and consumer spending continues to rise, leading some economists to warn of a contraction in the second trimester.

But there are signs of cracks, including a drop in home sales, a dramatic drop in mortgage applications and a rising share of spending on basic necessities.

Officials said the US economy was strong enough to withstand higher rates without a serious slowdown, but others, including former Treasury Secretary Lawrence Summers, say they are too optimistic that job losses will have to increase strongly to control inflation.

Kohn said it will be important for Powell to communicate clearly what data the Fed is looking for to slow or halt the rate hike cycle.

“I think a fairly shallow recession,” with unemployment higher than the 3.7% forecast by the Fed last month, “will be needed to break this inflationary spiral,” he said.

“But, boy, the amount of uncertainty surrounding it is just enormous.”