- 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 might have softened its rate hikes and the economy could have avoided a recession.
it didn’t happen. Inflation slowed, but barely. Year-over-year he eased to 8.3% from 8.5%, but prices accelerated from flat the previous month as he rose 0.1% in August alone. Fed officials have made it clear they will back off rate hikes only if there is “compelling evidence” that inflation is slowing. plug.
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 towards the end of the year, with big hikes and little sign of slowing down.
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.
Market positioning last week suggested a 0.5 percentage point hike with a 76% chance, according to CME Group data. A majority see the authorities raising interest rates another 0.75 percentage points in his 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 looking for two more 0.75pt rate hikes and another 0.5pt rate hike to end the year. This would leave 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 rates rose to his highest level since 2008 last week, further undermining housing affordability in an already tense housing market. Credit card interest rates will rise sharply through his 2022, increasing interest payments to those with large amounts of debt. 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 curbing inflation by sharply raising interest rates would “cause some pain” to households and businesses in the form of a less favorable job market and higher loan prices. That 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.