Recession ‘Virtual Certainty’ as Interest Rates Spike
Interest rates are now 1.5 percentage points higher than they were a few months ago. On Wednesday, the Federal Reserve raised interest rates by three-quarters of a percentage point, following a 0.5 percentage point increase in May and a 0.25 percentage point increase in April.
Yesterday’s rate increase is the single biggest interest rate hike since 1994.
And this isn’t even the ceiling, said Federal Reserve Chairman Jerome Powell at a Wednesday press conference. Americans can expect “ongoing rate increases,” Powell said, and “either a 50 or 75 basis point increase seems most likely at our next meeting.”
The Fed didn’t think it would come to this. Back in May, Powell said “seventy-five basis points is not something the committee is actively considering.”
“By this point, we had actually been expecting to see clear signs of inflation flattening out and ideally beginning to decline,” Powell admitted yesterday. “Contrary to expectations, inflation surprised to the upside. We thought that strong action was warranted at this meeting in the form of a 75 basis point rate hike.”
The goal, of course, is to combat the rampant inflation we’ve been seeing.
“Inflation remains well above our longer-run goal of 2 percent,” said Powell in his opening statements. “Over the 12 months ending in April, total [personal consumption expenditures, or PCE] prices rose 6.3 percent; excluding the volatile food and energy categories, core prices rose 4.9 percent. In May, the 12-month change in the Consumer Price Index came in above expectations at 8.6 percent, and the change in the core CPI was 6 percent.”
“Aggregate demand is strong, supply constraints have been larger and longer lasting than
anticipated, and price pressures have spread to a broad range of goods and services,” Powell said by way of an explanation. And, in response, the Federal Open Market Committee has “revised up” its inflation projections. “The median projection is 5.2 percent this year and falls to 2.6 percent next year and 2.2 percent in 2024,” said Powell.
Meanwhile, the Biden administration still refuses to try and halt inflation through smart policy changes, like repealing tariffs on steel and aluminum (or any/everything else) and cutting federal spending. And, at the same time, it’s pushing policy changes—like expanding antitrust action—that could make inflation worse. Instead, all hopes are pinned on interest rate changes—recession potential be damned.
“By raising rates from near zero at the start of the year, the central bank is making it more expensive for businesses and people to borrow money,” writes Allison Morrow at CNN Business:
Which obviously sucks if you’re a business owner looking to expand or if you’re looking to buy a home, or take out any kind of loan for any kind of reason in the near term.
Life’s already so expensive, and now you’re going to jack up the interest rate on my credit cards, Jay? What, I’m supposed to just stop shopping now?
And the answer is yeah, pretty much.
So the powers that be hope higher interest rates mean less demand and, eventually, lower prices.
But this strategy comes with risks. Which is why one can find recession predictions all over the place right now.
“It’s a virtual certainty that we’re going to go int
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