- August’s higher-than-expected inflation means the Fed is likely to make another big rate hike next week.
- Rising interest rates have already made home loans, auto loans, and credit cards very expensive for Americans.
- With the market now expecting more rate hikes into 2023, households should prepare for more economic pain.
Starting in early 2022, it will be much more expensive to take out a mortgage, take on credit card debt, or take out any type of loan.
New data suggests the surge is just beginning, and it could bring more pain in the form of job cuts and small pay increases.
The Federal Reserve’s inflation battle came to a crossroads when the consumer price index updated on Tuesday. Had inflation been lower than expected in August, the central bank could have moderated rate hikes and the economy could have avoided a crisis. slow growth.
it didn’t happen. Inflation slowed, but barely.year-on-year eased from 8.5% to 8.3%, but prices were up 0.1% in August alone, accelerating from flat the previous month. The Federal Reserve has made it clear that it will only back out on rate hikes if they see it. “compelling evidence“Inflation is slowing. The August report does little to match that description.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said there was “no chance” of the Fed slowing its pace and raising interest rates by just 0.5 percentage points. rice field. Markets, economists and analysts see another 0.75 percentage point hike – a third in a row – as all but certain.
Interest rates are the Fed’s best tool for containing inflation. Rising borrowing costs tend to slow economic growth as Americans curb spending and businesses delay expansion plans. Demand falls, supply catches up, and upward pressure on prices eases.
Higher rates also put more pressure on the labor market. Employers tend to hold back on hiring plans and hold back salary increases when debt is high. Declining demand can lead to a significant drop in revenue and even force companies to lay off staff entirely.
Inflation on Tuesday didn’t just change the calculations for the Fed’s September meeting. Economists are now gearing up for a more aggressive hiking cycle through the rest of the year, with big hikes and few signs of a slowdown.
For the average American, that means expensive loans, small pay raises, and increased risk of unemployment.
The Fed’s rate hike plans have become even more aggressive
In just one week, bets on how the Fed will hike rates have risen significantly. Traders now expect a significant rate hike cycle through the end of 2022.
Last week’s market positioning showed a 76% chance of a 0.5 point hike, according to data from. CME GroupA majority expect the authorities to raise interest rates by another 0.75 percentage points in November to a range of 3.75% to 4%.
Market bets show the Fed won’t stop there. CME data pegs the odds of his half-point rate hike in December at 40%. A week ago, option positioning indicated a 75% chance that interest rates would rise by a quarter of a percentage point at that meeting.
In short, investors are now looking to close out the year with two more hikes of 0.75 points and another 0.5 points. This would make interest rates at the end of 2022 half a percentage point higher than expected just a week ago. After weeks of hawkish rhetoric and disappointing inflation reports by Fed officials, the market seems finally close to the central bank’s ‘go big or go home’ outlook.
Pantheon’s Shepardson said, “The Fed has made it clear that it will not take the risk, even if it increases the risk of excessive tightening.
That tightening is already affecting Americans’ finances. Mortgage interest rates last week highest level since 2008It’s driving down home prices even further in an already tight housing market.credit card rate soared Increased interest payments to those with large debts through 2022. And since it usually takes about a year for a rate hike to be fully reflected in the broader economy, this tightening effect is only going to get stronger.
Fed officials also made it clear that they want to avoid the biggest risks associated with tightening monetary policy. Fed Chairman Powell warned in August that a large rate hike would cool inflation.bring painIt’s affecting households and businesses in the form of a less favorable job market and more expensive loans.The discomfort will probably still be worth it in the long run, he added.
“These are the unfortunate costs of keeping inflation under control, but failure to restore price stability would mean far greater pain,” Powell added.