June 13, 2022, 4:00 p.m. ETThe Federal Reserve building in Washington. The central bank is set to release a new wave of financial forecasts on Wednesday. Credit … Pete Marovich for The New York Times The US Federal Reserve is likely to discuss raising interest rates since 1994, when policymakers meet this week, as a series of new data suggests that inflation is rising and proving more stubborn than expected. The central bank is likely to consider raising interest rates by three-quarters of a percentage point on Wednesday as it announces both its decision and a new set of financial forecasts. The Fed raised interest rates by half a percentage point in May, and officials had suggested for months that a similar increase would be justified at its June and July meetings if data were to turn out as expected. But inflation figures have not come as expected. In contrast, a report last week showed that inflation accelerated again in May and has been running at the fastest pace since 1981. Two separate measures of inflation expectations, one last week and one released on Monday, showed that consumers have begun to expect significantly faster prices rising. This is sure to raise concerns about the Fed, which is trying to offset high inflation before changing behavior and becoming a more permanent feature of the economic landscape. And a flurry of bad news has led economists and investors to bet that the central bank will start raising interest rates with a faster clip to signal that it recognizes the problem and prioritizes fighting inflation. “They have made it quite clear that they want to prioritize price stability,” said Pooja Sriram, a Barclays economist. “If this is their plan, they must pursue a more aggressive policy.” Wall Street is preparing for higher interest rates than investors expected a few days ago, a reality that is collapsing stocks and causing bleeding in other markets. Investors are now expecting interest rates to rise in the range of 2.5 to 2.75 percent from the Fed rally in September, suggesting that central bankers will have to make a three-quarter move over the next three sessions. . The Fed has not made much of a move since the early 1990s, and this 2.75% ceiling would be the highest federal interest rate since the global financial crisis in 2008. As the Fed raises its policy rate, it filters the economy to make all types of lending more expensive — including mortgages and business loans. This slows down the housing market, prevents consumers from spending so much, and cools corporate expansions, weakening the labor market and the wider economy. Slower demand can help mitigate price pressures as fewer buyers compete for goods and services. But interest rates are a blunt tool, so it is difficult to slow down the economy precisely. Likewise, it is difficult to predict how many conditions need to be cooled in order to convincingly reduce inflation. Pandemic-related supply issues could be eased, allowing for a slowdown. However, the war in Ukraine and China’s recent redesigned lockdowns to curb the coronavirus could keep prices high. That is why investors and households are increasingly afraid that the central bank will cause a recession. Consumer confidence is plummeting and a message from the bond market that traders are watching closely suggests that a recession may be coming. The yield on the 2-year government bond, a benchmark for borrowing costs, rose slightly above the 10-year yield on Monday. This so-called inverted yield curve, when borrowing costs more for shorter periods than longer periods, usually does not occur in a healthy economy and is often taken as an indication of an impending recession. See more
