The Fed’s move would raise its key interest rate, which affects many consumer and business loans, to a range of 2.25% to 2.5%, its highest level since 2018. Speaking at a news conference after the Fed’s latest policy meeting, Chairman Jerome Powell gave mixed signals about the central bank’s likely next moves. He stressed that the Fed remains committed to combating chronically high inflation, while holding back the possibility that it will soon retreat to smaller rate hikes. And even as concerns grow that the Fed’s efforts could eventually trigger a recession, Powell missed several opportunities to say the central bank would slow its hikes if a recession emerged while inflation was still high. Roberto Perli, an economist at Piper Sandler, an investment bank, said the Fed chair emphasized that “even if it caused a recession, the reduction in inflation is important.” But Powell’s suggestion that rate hikes could slow now that the key rate is around a level believed to neither support nor curb growth helped spark a strong rally on Wall Street, with the S&P 500 surging by 2.6%. The prospect of lower interest rates generally fuels stock market gains. At the same time, Powell was careful during his press conference not to rule out another three-quarter hike at the Fed’s next policymakers meeting in September. He said the rate decision would depend on what comes out of the many economic reports that will be released between now and then. “I don’t think the U.S. is currently in a recession,” Powell said at his press conference, in which he suggested the Fed’s rate hikes have already had some success in slowing the economy and possibly easing inflationary pressures. The story continues The central bank’s decision follows a rise in inflation to 9.1%, the fastest annual rate in 41 years, and reflects its painstaking efforts to slow price gains across the economy. By raising lending rates, the Fed makes it more expensive to get a mortgage or car or business loan. Consumers and businesses probably borrow and spend less, cooling the economy and slowing inflation. Bursting inflation and fears of a recession have eroded consumer confidence and fueled public concern about the economy, which is sending disappointingly mixed messages. And with November’s midterm elections looming, American discontent has dented President Joe Biden’s approval ratings and raised the possibility that Democrats will lose control of the House and Senate. The Fed’s moves to tighten credit sharply have torpedoed the housing market, which is particularly sensitive to changes in interest rates. The average interest rate on a 30-year fixed mortgage has roughly doubled in the past year, to 5.5 percent, and home sales have fallen. Consumers are showing signs of cutting back on spending in the face of high prices. And business surveys show that sales are slowing. The central bank is betting it can slow growth enough to tame inflation but not enough to trigger a recession — a risk many analysts fear could end badly. In his press conference, Powell suggested that with the economy slowing, demand for workers modestly declining and wage growth possibly peaking, the economy is developing in a way that will help reduce inflation. “Are we seeing the slowdown in economic activity that we think we need?” asked. “There are some indications that we are.” The Fed chairman also pointed to measures that suggest investors expect inflation to fall back to the central bank’s 2 percent target over time as a sign of confidence in its policies. Powell also backed a forecast by Fed officials last month that the benchmark interest rate would reach a range of 3.25% to 3.5% by the end of the year and about half a percentage point higher in 2023. That forecast , if true, would signal a slowdown in Fed hikes. The central bank will meet its target at the end of the year if it raises its key interest rate by half a point when it meets in September and by a quarter at each of its meetings in November and December. Given that the Fed has now imposed two significant rate hikes in a row, “I think they’re going to tiptoe from here,” said Thomas Garretson, senior portfolio strategist at RBC Wealth Management. On Thursday, when the government estimates gross domestic product for the April-June period, some economists believe it may show the economy contracted for a second straight quarter. This would satisfy a long-held hypothesis about when a recession will begin. But economists say that would not necessarily mean a recession had begun. During those same six months when the overall economy may have contracted, employers added 2.7 million jobs — more than in most entire years before the pandemic. Wages are also growing at a healthy pace, with many employers still struggling to attract and retain enough workers. But the slowdown in growth puts Fed policymakers in a high-stakes dilemma: How high should they raise lending rates if the economy slows? Weaker growth, if it causes layoffs and increases unemployment, often reduces inflation on its own. That dilemma could become even more consequential for the Fed next year, when the economy may be in worse shape and inflation will likely still be above the central bank’s 2 percent target. “How much recession risk are you willing to take to get (inflation) back to 2%, quickly, compared to over many years?” asked Nathan Sheets, a former Fed economist who is global chief economist at Citi. “These are the kinds of problems they will have to contend with.” Bank of America economists predict a “mild” recession later this year. Goldman Sachs analysts estimate a 50-50 chance of a recession within two years.
AP Economics writer Paul Wiseman contributed to this report. Christopher Rugaber, The Associated Press
