Could the Third Time Be the Charm? Unlikely … and the Fourth Time May Not Be Charming Either
If today’s price inflation had a portrait, it might appear next to the definition of stubborn in the dictionary.
Inflation has come down only slightly from its recent 40-year high, prompting the Fed to raise the federal funds rate by 75 basis points (.75%) a third consecutive time to a target range of 3–3.25% at its late-September meeting. The increase follows increases of 75 basis points at the Fed’s June and July meetings (there was no August meeting).
Additionally, Fed Chairman Jerome Powell held out the likelihood of additional rate increases at the Fed’s remaining 2022 meetings in early November and mid-December (there is no October meeting).
Powell suggested that the Fed will raise the fed funds rate by another 125 basis points—to a level between 4% and 4.5%—by the end of the year. Such a move creates the possibility of yet another 75-basis-point increase followed by a 50-basis-point increase or, depending on what data show over the next month, two consecutive 50-basis-point increases for a slightly smaller increase of 100 basis points.
“Chairman Powell acknowledged that the Fed’s rate increases are going to be painful for households, but they’re going to do whatever they can to get inflation under control,” said Kiran Kini, CoBank senior vice president and treasurer. “They are committing to higher rates even at the expense of higher unemployment and a recession, because they view that as the right thing to do in the long run.
“Our base case view remains that there will be a recession in 2023. It’s hard for the Fed to get inflation under control without reducing demand because the supply-side issues are taking longer to fix than anticipated. The only tool they can use to get inflation under control is to reduce demand, which has painful consequences.”
Amid the Fed’s tightening, a strong U.S. dollar also is playing a role. Typically, the strengthening of the dollar against foreign currencies would suppress global demand. However, demand for many American agricultural goods remains strong because of the shortage caused by the catastrophic war in Ukraine.
What’s coming next in the ongoing interest rate saga? Tune into the news on October 13, 2022, when the Bureau of Labor Statistics will release the Consumer Price Index (CPI) for September. The CPI—which was 8.3% in August—is one of the primary gauges of annual inflation.