After four straight three-quarter-point interest rate hikes, the U.S. Federal Reserve is set to announce a smaller half-point increase in its key rate Wednesday, a first step toward dialling back its efforts to combat inflation.
The six rate hikes the Fed has already imposed this year have raised its key short-term rate to a range of 3.75% to 4%, its highest level in 15 years. Cumulatively, the hikes have led to much costlier borrowing rates for consumers as well as companies, ranging from mortgages to auto and business loans. Worries have grown that the Fed is raising rates so much in its drive to curb inflation that it will trigger a recession next year.
"The data kind of fits with our idea that the Fed will downshift further in February," said Matthew Luzzetti, an economist at Deutsche Bank and a former research analyst at the Fed. "Downshifting helps to maximize their prospects of a soft landing," in which the Fed's rate hikes would slow growth and tame inflation but not tip the economy into a recession.
Fed officials have also said they want rates to reach "restrictive" levels that slow growth and hiring and bring inflation down to the their annual target of 2%. In remarks late last month, Powell said he was tracking price trends in three different categories to best understand the likely path of inflation: Goods, excluding volatile food and energy costs; housing, which includes rents and the cost of homeownership; and services excluding housing, such as auto insurance, pet services and education.
As a result, Powell's biggest focus has been on services, which he said are likely to stay persistently high. In part, that's because sharp increases in wages are becoming a key contributor to inflation. Services companies, like hotels and restaurants, are particularly labour-intensive. And with average wages growing at a brisk 5%-6% a year, price pressures keep building in that sector of the economy.
Increasing Interest Rates = Increasing Inflation, how does no one get this? When you hear that increasing interest rates is helping to fight inflation that is code for CEO's and Company Presidents are protecting their pay checks.