So far, the Federal Reserve has seen few reassurances that its souped-up rate hikes are working, with households feeling the strain of costlier rent, groceries and gas. (Matt McClain/The Washington Post)
Updated July 27, 2022 at 4:08 p.m. EDT|Published July 27, 2022 at 6:00 a.m. EDT
Taking aim at stubborn inflation, the Federal Reserve on Wednesday raised interest rates for a fourth time this year to further slow down the economy, arguing that some short-term pain could be the only way to avoid longer-lasting scars.
The Fed hiked interest rates by three-quarters of a percentage point, following a similarly aggressive rate hike in June, even as Chair Jerome H. Powell acknowledged that the Federal Reserve sees previous hikes as already weighing on housing, business investment and consumer demand.
Speaking at a news conference, Powell said he believes the economy is not in a recession. But the paths to avoiding one are narrower than just a few months ago, he added. With inflation remaining at 40-year highs and June prices coming in especially hot, Powell emphasized that controlling inflation is the Fed’s chief priority, even if it brings a slowdown in the job market for now.
“Restoring price stability is just something we have to do,” Powell said. “There isn’t an option to fail to do that, because that is the thing that enables you to have a strong labor market over time.”
He added: “If you fail to deal with it in the near term, it only raises the cost of dealing with it later.”
Inflation has plagued policymakers for months, becoming the economy’s biggest problem and weighing on families nationwide, but especially the most vulnerable lower-income families. Higher prices for milk, gas and clothing have soured people’s sense of how the economy is working for them, dampening consumer sentiment and influencing families to change their own spending behavior, which can worsen inflation.
The glum economic mood has also become a major political problem for the Biden administration going into the midterm elections.Republicans continue to blame Democrats’ stimulus efforts from earlier in the pandemic for supercharging the economy and have resisted more federal spending.
The Biden administration has supported the Federal Reserve, emphasizing that the Fed is best equipped to tackle inflation. However, two high-profile Democrats this week blasted the central bank, arguing that rate hikes do little to address the root causes of inflation, while endangering jobs.
The Federal Reserve hiked interest rates by three-quarters of a percentage point on July 27. (Video: The Washington Post)
Manchin says he has reached deal with Democrats on economy, climate bill
“With wage growth declining in recent months, our country’s lowest-paid, most vulnerable workers have endured too much already to be sacrificed in pursuit of severe rate hikes that have far too often triggered recessions,” said Rep. Pramila Jayapal (D-Wash.), the leader of the Congressional Progressive Caucus.
Powell’s tone in the news conference— standing behind tough choices to curb inflation —contrasted this time last year, when inflation was steadily creeping up but policymakers at the Fed and White House argued it would be short-lived and not fundamentally threaten the economy.
The changing shape of inflation
Now, the Fed is faced with inflation that climbed to 9.1 percent in June, compared with the year before. And policymakers are trying tokeepmomentum flowing through the robust job market and keep American workers employed, especially while they are paying more for housing, electricity and meals.
The grim reality, though, is that the tight labor market will have to loosen up for the Fed to make any progress on inflation, which means job freezes and even cuts.
Powell’s argument is that the trade-off needs to come sooner rather than later, said Joe Brusuelas, chief economist at RSM.
“The big takeaway is that the Fed is now deep into its price stability campaign,” Brusuelas said. “If the Fed does not nip this in the bud, it’s setting itself up for institutional failure.”
The financial markets rallied on Powell’s hints that the Fed could slow the pace of its rate hikes in the coming months. Powell left the door open for another rate hike of three-quarters of a percentage point at the next policy meeting in September. But he also said all decisions will depend on the latest data.
The Dow Jones industrial average jumped nearly 1.4 percent, the S&P 500 gained 2.62 percent, and the Nasdaq composite index climbed 4.06 percent.
The Fed’s interest rate decision comes as economists and policymakers already fear the economy is headed toward a recession. Second-quarter GDP figures will be released Thursday morning, and there’s a chance that the economy will have actually shrunk, similar to the first quarter.Six consecutive months of negative growth usually signals a recession.
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Some sort of economic slowdown is expected, compared with last year’s gangbuster growth. Powell repeatedly warned that there would be a “softening in labor market conditions,” although he did not go so far as to explicitly mention “layoffs” or “job losses” that often accompany a prolonged spate of rate hikes.
He instead focused on the need to slow inflation for the sake of the job market in the long term. Lower inflation would also mean wages aren’t being eaten up by high inflation.
“We think that there’s a path for us to be able to bring inflation down while sustaining a strong labor market,” Powell said. “That’s what we’re trying to achieve. We continue to think that there’s a path to that. … We know the path has clearly narrowed. … It may narrow further.”
Yet one of the main reasons the labor market is unsustainably hot is because there are more job openings than people looking for work. Rate hikes can’t will people to rejoin the labor market, butthey can cool employerdemand for new hires or promptthe unemployment rate to tick up.
In some sectors, job cuts already are happening. Some companies that hired rapidly during the pandemic have realized that their business models are not a fit for the post-pandemic economy, or that they simply have not been able to handle the cost of inflation. Peloton has laid off thousands of workers. Microsoft is making cuts. Netflix, Tesla and Coinbase have all announced job cuts or hiring freezes. Multiple mortgage lenders across the country, including Wells Fargo and Better.com, have laid off thousands of people as demand for home loans and refinancing drops off.
The job market is beginning to show cracks
The Fed’s workis slowing down other parts of the economy, too. New data shows that mortgage demand softened for the fourth consecutive week in the latest sign yet that the once-sizzling housing market is slowing down. Home sales are also falling in a few markets.
This week, both Microsoft and Google parent Alphabet reported slower growth in earnings reports. General Motors, one of the nation’s largest automakers, reported far lower profits, with CEO Mary Barra warning that the company is working to reduce spending and limit hiring.
Indeed, concerns that interest rate hikes are slowing the economy too much fueled new criticism fromsome members of President Biden’s own party, particularly left-leaning lawmakers, who said it could cause Americans immense financial harm.
Jayapal said she has “serious concerns” that the Fed’s interest rate hikes have jeopardized the president’s pledge to “grow the economy from the bottom up and the middle out,” she said in a statement.
Her comments come days after Sen. Elizabeth Warren (D-Mass.) took to the pages of the Wall Street Journal to argue that the Fed — and Powell, in particular — “is on the verge of sacrificing all this progress” that Democrats had made to revive the economy in the wake of the pandemic.
On Capitol Hill, Democrats have explored a wide array of policy proposals they say can respond to inflation. They reached a major step on Wednesday, when Sen. Joe Manchin III (D-W.Va.) secured a deal with Senate Majority Leader Charles E. Schumer (D-N.Y.) on legislation that aims to lower health-care costs, combat climate change and reduce the federal deficit. The deal is a significant potential breakthrough for Biden’s economic agenda, which has been stalled by concerns over high inflation and resistance to more federal spending among Republicans and some moderate Democrats.
Abha Bhattarai, Tony Romm and Aaron Gregg contributed to this report.
Nasdaq surges more than 4 percent as Powell addresses recession fears
Stocks surged across the board Wednesday after the Federal Reserve raised its benchmark interest rate as expected and Chair Jerome H. Powell said he does not think the United States is in a recession.
The Dow Jones industrial average shot up more 434 points, or 1.4 percent, to close at 32,196. The broader S&P 500 index jumped 2.6 percent to settle at 4,023, while the tech-heavy Nasdaq composite index swelled 4.1 percent to end the trading day at 12,032.
Markets have been teetering on fears of a recession — the S&P 500 is down 16 percent year to date — partly because of the Fed’s aggressive inflation-fighting campaign. The central bank raised rates by 0.75 percent on Wednesday, its fourth increase this year.
The market gains accelerated after Powell’s recession comments, even though he acknowledged that the path to avoid one has narrowed.
Analysts said that the rate hike was priced in before the announcement and that investors seemed to welcome Powell’s “slightly dovish” comments, as Infrastructure Capital Advisors chief executive Jay Hatfield put it in a note to investors.
Powell also provided more detail on what would need to happen before the Fed lets up on rate-raising. “The Fed wants to be able to see inflation slowing without putting on their glasses, and the data just aren’t there yet,” Comerica Bank chief economist Bill Adams wrote.
Fed Chair Jerome H. Powell repeatedly warned reporters Wednesday that there would be a “softening in labor market conditions,” as the Fed raises interest rates again in an effort to cool down inflation.
Powell did not go so far as to explicitly mention “layoffs” or “job losses” that can accompany prolonged interest rate hikes. He focused on the need for job growth to slow inflation down.
“There will be in all likelihood some softening in labor market conditions,” Powell said. “We need growth to slow to below potential growth. We don’t want this to be bigger than it needs to be, but ultimately if you think about the medium and longer term, price stability is the thing that makes the whole economy work. It can give us a strong labor market and wages that aren’t being eaten up by high inflation.”
Fed expects lower economic growth, as rates increase
Fed Chair Jerome H. Powell on Wednesday stressed that the central bank is keeping a close eye on slowing economic conditions as it tries to determine how aggressively to cool the economy to combat inflation.
He said it is likely the Fed could slow the pace of interest rate hikes in coming months as it tries to assess the ripple effects of those increases on unemployment, wages, consumer spending and other key data points across the economy. Upcoming decisions, he said, will be made on a “meeting-by-meeting basis” based on what the latest data shows.
“We are highly attentive to inflation risks and determined to take the measures necessary to return inflation to our 2 percent longer-run goal,” Powell said in an afternoon news conference. “This process is likely to involve a period of below-trend economic growth and some softening in labor market conditions, but such outcomes are likely necessary to restore price stability.”
Powell said he doesn’t think the U.S. is in a recession now
Fed Chair Jerome H. Powell said during a news conference Thursday that he doesn’t believe the U.S. economy is in a recession right now. But he also acknowledged the path to avoiding a recession has narrowed.
Powell pointed to the still-growing job market as a major hallmark of the economy’s strength. He said that for the economy to slow further, the Fed needs to see a drop off in hiring and maybe even a small uptick in the unemployment rate.
“We think that there’s a path for us to be able to bring inflation down while sustaining a strong labor market,” Powell said, noting that would include some softening in the job market. “That’s what we’re trying to achieve. We continue to think that there’s a path to that. … We know the path has clearly narrowed. … It may narrow further.”
Interest rate hikes are designed to cool demand in the economy, and they can’t do much to address the supply-side issues that are driving up prices. Higher rates also can’t encourage more people to seek jobs, which is one of the reasons there are far more job openings than there are people looking for work. Getting the labor market back into balance is key for the Fed to avoid a recession.
Democratic lawmakers say rate hike may undermine Biden’s economic goals
The Federal Reserve’s latest rate hike drew sharp rebukes from some members of President Biden’s own party, particularly left-leaning lawmakers, who said it could cause Americans immense financial harm.
Rep. Pramila Jayapal (D-Wash.), the leader of the Congressional Progressive Caucus, stressed in a statement she has “serious concerns” that the Fed had jeopardized the president’s past pledge to “grow the economy from the bottom up and the middle out.”
Jayapal’s comment comes days after Sen. Elizabeth Warren (D-Mass.) took to the pages of the Wall Street Journal to air similar criticism. She argued Thursday that the Fed and its leader, Chairman Jerome Powell, “is on the verge of sacrificing all this progress” that Democrats had made to revive the economy in the wake of the pandemic.
The Democratic blowback reflects the tension facing the Fed and the rest of Washington in responding to record inflation. The central bank’s moves to raise interest rates might help reel in prices over the long term, but they still carry immediate financial consequences for families, affecting everything from home mortgages to job openings.
On Capitol Hill, Democrats have explored a wide array of policy proposals that they believe can respond to inflation — from combating price gouging at the gas pump to combating corporate consolidation. But many of those ideas remain mired in partisan warfare, as Republicans refuse to lend their must-have votes in the Senate.
Democrats also have tried to advance an economic package targeting healthcare costs using a special legislative tactic that allows them to override GOP opposition. But that proposal, a shell of its former self, has faced months of delays as party leaders try to work out a deal with Sen. Joe Manchin III (D-W.Va.).
For the moment, Jayapal said the Fed’s efforts “to deliberately slow the economy” would cause hardship without actually addressing inflation. She predicted it could deter companies from making capital investments and force employers to slow hiring or layoff existing workers.
“With wage growth declining in recent months, our country’s lowest-paid, most vulnerable workers have endured too much already to be sacrificed in pursuit of severe rate hikes that have far too often triggered recessions,” Jayapal said.
Higher interest rates will drive U.S. debt payments to record levels, CBO says
Higher interest rates will help force the U.S. government to make record levels of payments on its outstanding debt by next decade, according to a new report from the Congressional Budget Office.
The CBO, Congress’s nonpartisan scorekeeper, found in a report released Wednesday that the cost to the federal government of servicing its debt — simply making interest payments on money already borrowed — will rise to a record 3.3 percent of the nation’s gross domestic product by 2032.
The report reflects the higher costs to the U.S. government resulting in part from the central bank’s efforts to cool inflation with higher interest rates. Federal Reserve Chair Jerome H. Powell on Wednesday was poised to announce a rate increase of three-quarters of a percentage point.
Under CBO’s projections, by the end of the next three decades, paying off the nation’s debt would be the most expensive federal program — more costly than even Social Security or Medicare, said Marc Goldwein, senior vice president of the Committee for a Responsible Federal Budget, a D.C.-based think tank.
Share with The Post: What’s one way you’ve felt the impact of inflation?
Albert Elliott has been fueling up his Kia Soul in increments of $15, $20 and $25 to make the 60-mile commute from Fayetteville, N.C., to an Amazon warehouse in Raleigh, where he makes $15.75 an hour. Lately, he doesn’t have enough cash to fill his tank the entire way.
In June, gas prices had gotten so steep that Elliot took on a second job as a janitor at a community college, working an extra two days a week for $10 an hour.
“Gas is just through the roof. Unless it’s payday, I put in all the money I have at the time, sometimes borrowing money from family and friends,” Elliott said. “I began to realize that what I was making at Amazon was not enough to pay for gas. My biggest concern is not being able to get to work to make any money. You have to pretty much rob Peter to pay Paul.”
A tight labor market has pushed wages up across the board — but not enough to keep pace with inflation.
That’s forcing workers like Elliott toseek second jobs and increase their hours to pay for their normal expenses. The percentage of employed people working multiple jobs in the United States has steadily increased, from 4 percent in April 2020 to 4.8 percent in June 2022, according to data from the St. Louis Federal Reserve. While people taking on multiple jobs is typically a sign of a healthy job market — where workers have more job opportunities available — it is also a sign of increasing financial strain on Americans.
Mortgage demand continues to fall even as rates ease
Mortgage demand softened for the fourth straight week, new data shows, the latest sign yet that the once-sizzling housing market is slowing down.
The volume of mortgage applications fell 1.8 percent from a week earlier, the Mortgage Bankers Association reported Wednesday. But that’s an 18 percent decline from the same period a year ago.
Joel Kan, the group’s associate vice president of economic and industry forecasting, said “increased economic uncertainty and prevalent affordability challenges” are keeping people out of the market, “leading to declining purchase activity that is close to lows last seen at the onset of the pandemic.”
The weaker mortgage applications track along with data showing a slowdown in the number of home sales, he said, although he added that stabilizing mortgage rates could bring buyers back to the market in the second half of the year.
Mortgage rates have pulled back slightly in recent weeks after surging earlier in the year. The average 30-year fixed-rate mortgage was 5.74 percent, according to the MBA’s Wednesday report, compared with 5.82 percent a week earlier.
Inflation: How you can beat it — or even benefit from it
Like a guest who overstays his welcome, inflation is getting on our nerves.
For people with enough income or savings, rising prices are just an annoyance. If you’re living paycheck to paycheck, inflation means a much harder time paying for food, gas and other items. It could mean skipped meals or late rental payments.
The latest inflation data, released by the Bureau of Labor Statistics, showed prices increased 9.1 percent in June over the same period a year ago. The rising cost of housing and energy — fuel, oil, gasoline, and electricity — were the largest contributors to the uptick. The higher cost of food also drove inflation.
Predictions last year that rising prices might be temporary were wrong. So, until things stabilize, here’s how to handle increases in consumer prices.
Walmart cut its profit outlook. Here’s why that might worry rivals.
Walmart sounded alarms Monday when it slashed its quarterly and full-year profit forecasts — a warning that so rattled Wall Street, the retailer’s stock went into a nosedive.
Household spending has been resilient this year even in the face of other economic challenges — including scrambled energy markets, supply chain bottlenecks and decades-high inflation. Because consumers power more than two-thirds of the economy, their willingness to spend has been held up as a key counterpoint to views the nation is barreling toward recession.
But the message from the nation’s largest retailer is a sure sign that stubbornly high prices are changing how people spend. The shift not only hurts its bottom line, it leaves more inventory gathering dust on store shelves and in warehouses. That motivates the company to aggressively mark down merchandise that customers may no longer want or can’t afford. What’s more, Walmart’s story may be a harbinger for other retailers and the broader economy. Here’s why.
Matt Miller thought he was getting a promotion when he met with his boss last week. Instead, he got laid off.
Business at thePennsylvania art industry firm where he worked had been brisk until a few months ago. But lately, jitters about the crashing stock market and a possible recession had many regulars tapping the brakes on new purchases.
“Over the last three months, sales dropped 50 percent, then 50 percent again, until they were basically at zero,” said Miller, 32. “Most of our clients were in real estate or tech, and they’ve just disappeared. They don’t want to spend $10,000 on a painting if they’re worried things are going to crash in a few months.”
The labormarket, until now a pillar of economic resilience, is showing cracks.
Job growth is slowing, unemployment claims are ticking up and several big companies, including Apple and Meta, are putting hiring plans on hold. There are signs that more firms are slashing jobs in industries as varied as tech, advertising, health care, finance and law.
“What had been universally positive labor market news is certainly less so now,” said Liz Ann Sonders, managing director and chief investment strategist at Charles Schwab. “The anecdotes are starting to stack up of companies laying off workers or freezing hiring or limiting job postings.”
Over the past 18 months, Americans have faced ongoing waves of steep price hikes as inflation hit 40-year highs. It started with used and then new cars, later whole chickens and ground beef. Now it’s gas at the pump or an affordable two-bedroom apartment in Nashville. The forces fueling inflation keep changing.
At the start, inflation could be dodged by holding onto that old car or avoiding air travel. Now, record prices are concentrated on essentials such as groceries, housing and energy, raising the cost of just getting by for many.
Here is a breakdown of what has fueled inflation each month since the start of last year.
Is the economy working for you? This quiz will tell you.
Michelle Singletary, who writes The Washington Post’s Color of Money personal finance column, understands that you may be wondering how today’s economic news affects you. This week she’s teamed up withcolleagues to build this quiz to help you figure out how current economic events could affect your finances.
There’s no right or wrong answer. The questions are a way for you to gauge where you stand financially. Your score — and our financial advice — could help you prepare for what’s coming if the economy gets worse.
Take the quiz to get her guidance on your current financial situation.
