The Federal Reserve is hiking interest rates at its most aggressive pace in decades to bring down inflation that hit a 40-year high of 9.1% in June.
The Federal Reserve hiked its key interest rate to tame inflation. Here's why there may be more rate hikes coming. But the campaign has sharply increased the odds of a recession, with a Wells Fargo economist and others forecasting a downturn by early next year.
The hard-nosed strategy has sparked a debate among some economists: Which is worse – inflation or the recession the Fed may bring about to extinguish it? “It’s like saying: Which is worse – a kidney stone or appendicitis?” says Mark Zandi, chief economist of Moody’s AnalyticsFed officials, after all, believe they can dodge a downturn.
While rate hikes can dampen consumer and business demand and lower inflation expectations – a source of inflation itself -- they can’t affect key drivers of today’s inflation, such as supply chain bottlenecks and Russia’s war in Ukraine. And, they say, there are signs inflation will soon ease, pointing to falling commodity prices.
“While it’s terrible if anyone loses their job, the affect is not as broad-based as it is with inflation," he said. Runaway inflation leads consumers to expect that prices will continue to swirl higher. That, in turn, prompts them to demand bigger pay increases, which causes businesses to raise prices still higher to maintain profit margins, and so on.
With inflation, a consumer’s higher prices often translate to more revenue for landlords, oil companies and other corporations, he says. “One person’s cost is another’s income,” he wrote in a recent blog.The benefits of that reshuffled income are not as obvious, though. While consumers often spend their money, companies may dole it out to investors through higher dividends or share buybacks.
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