Fed announces another big interest rate hike to thwart inflation. When will it stop? – Los Angeles Times

www.latimes.com

Don Lee

WASHINGTON — 

In the most aggressive back-to-back interest rate increases since the early 1980s economic crisis, the Federal Reserve on Wednesday announced another three-quarters of a percentage point hike and signaled that it wasn’t done in its effort to beat back inflation despite rising risks of triggering a recession.

The Fed’s hefty increase in its benchmark rate, which forms the basis for borrowing costs on credit cards, home loans and other products, is aimed at further cooling the economy to help curb pricing pressures.

In its statement announcing the rate change, the Fed noted the slowing economy. “Recent indicators of spending and production have softened,” it said, adding that the Fed expects to make “ongoing increases” in its key interest rate as it strives to return inflation to its 2% target.

The central bank’s efforts have profound implications not just for the U.S. and global economies. As the Fed tries to steer between a rock and a hard place, it has raised the political stakes, especially for Democrats, because voters in the upcoming congressional elections are not going to like either a continued rise in prices or a downturn that would cost jobs and other unwelcome consequences.

If there are bright spots for President Biden and his party, it’s that gas prices have come off their highs in June and there’s positive news in an economic indicator that most Americans don’t usually pay much attention to: the value of the dollar against foreign currencies.

One offshoot of the Fed’s rate-hike campaign has been a surge in the dollar in recent months, which is making products from Europe, Asia and other parts of the world cheaper for American buyers.

Since the U.S. purchases trillions of dollars in imported products each year — including a wide array of things such as clothing, electronics, flowers and fresh vegetables — the stronger dollar is starting to make it a little easier for shoppers to deal with inflation for some goods.

“That’s one of the very few forces working against food price inflation,” said Ricky Volpe, an agribusiness professor at Cal Poly San Luis Obispo, noting persistent food-supply challenges involving labor, weather, transportation and energy.

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Reimagining Homeownership in LA County

The housing crisis in Southern California is getting worse. Today, Southern California has the fewest homes available per capita of any metro area in the country.

In June the cost to U.S. consumers for food produced at home was 12.2% more than a year earlier. That helped push up overall inflation to 9.1%, a four-decade high. Cereals and breads, eggs and milk, as well as poultry products have been rising even faster in recent months. By comparison, prices for imported foods including vegetables and fish have been trending down lately.

Carl Tannenbaum, chief economist at Northern Trust, said cheaper imports should provide a relatively small but notable help in lowering the rate of U.S. inflation as more companies pass on those savings to consumers.

The downside for American multinational corporations is that their exports and sales overseas will take a hit.

And the rapid and sharp gain in the dollar, Tannenbaum said, is inflicting real pain on some developing countries as they face bigger dollar payments for debt and commodities. The recent political turmoil in Sri Lanka reflected a severe economic crisis that included a shortage of dollars and a national currency that has now plunged more than 80% against the greenback.

Still, for American voters, a decline in import prices, along with companies like Walmart now starting to mark down merchandise due to excess inventory and slowing demand, could provide some relief from the decades-high inflation.

Jack Ablin, chief investment officer at Cresset Capital, said he thinks inflation may have peaked in June and July. Gas prices nationally averaged $4.30 a gallon Wednesday, down from $4.90 a month earlier.

“There’s growing evidence that consumers’ willingness and ability to spend is getting tired,” he said in a note to clients. “Moreover, households appear to have spent through their pandemic-supported cash hoard, as evidenced by a recent run-up in credit card debt and AT&T’s acknowledgement that an increasing number of their customers’ bills are past due.”

On Thursday, the government is expected to release data showing the U.S. economy declined in the second quarter, after earlier reports of shrinking activity in the first three months of the year. Republicans are likely to jump all over the news, as consecutive quarters of falling real gross domestic product, or economic output, is commonly seen as evidence of a recession.

An official determination of a recession is based on an array of data, and most economists say that while two negative quarters of GDP might constitute a “technical recession,” the U.S. doesn’t appear to be in an outright downturn at the present moment. Employment thus far has held up well and the picture of consumer spending, which accounts for two-thirds of economic activity, is still mixed.

GDP in the current third quarter, for now, looks lackluster. And what happens over the rest of the summer and beyond will depend at least in part on what the Fed does and how people react to its efforts to get inflation under control.

The Fed’s rate move Wednesday is the fourth increase this year and lifts its benchmark rate to nearly 2.5%, a level that’s considered neutral — that is, neither stimulative nor restrictive to the economy.

The question now is, how much more will the central bank do? In their June forecast, Fed officials projected their main rate to end the year at nearly 3.5%. And Fed Chair Jerome H. Powell could provide more guidance at a news conference Wednesday afternoon.

But there are a number of factors that will influence inflation and growth, which remain highly uncertain and are largely beyond the Fed’s control, including the war in Ukraine, the global economic situation and pandemic lockdowns in China.

Supply chain problems at ports and in other parts of the logistics system have eased somewhat in recent weeks, but there’s still a shortage of parts and goods, particularly for new autos.

And it will take time before the backlog of orders is cleared and companies adjust to shifting supply chains, said Shawn DuBravac, an economist and president of Avrio Institute, a consulting firm. But, he said, with demand slowing and inventories of things like apparel relatively high, many more businesses don’t have the pricing power they had at the start of the year.

In recent days, some of the biggest companies, including Microsoft, General Motors, Alphabet and Walmart, have reported lower profits. And companies in finance, housing and some other sectors have cut their outlook and are shedding jobs.

https://www.latimes.com/politics/story/2022-07-27/fed-battling-to-tamp-down-inflation-gears-up-to-make-another-big-interest-rate-hike

2 comments on “Fed announces another big interest rate hike to thwart inflation. When will it stop? – Los Angeles Times

  1. Increase interest rates allow people to earn money from saving, rather than having to invest in the stock market AND paying to keep your money in the bank. That assumes you have any money to save. I don’t think that the credit card companies have done a good job of passing on low interest rates, anyway.

    Liked by 1 person

    • They are flat out lying to us, they treat us like we’re deaf dumb and blind!! Now credit card companies are charging anywhere from 3% to 9% more if you use your credit card… and saying the average is $4.30 a gallon is BS…I’m paying more than $5.50 a gallon!

      Like

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