(WASHINGTON) — Economists expect a major rate hike from the Federal Reserve on Wednesday, the latest in a series of borrowing cost increases as the central bank tries to slash near-historic inflation while avoiding a recession.
The Fed will likely raise the benchmark interest rate 0.75%, which would repeat an identical hike instituted by the central bank last month, according to a survey of economists by Bloomberg.
The significant rate hike, which until last month had not been matched since 1994, follows data released earlier this month showing that prices jumped a staggering 9.1% in June. That inflation rate, last seen more than four decades ago, put additional pressure on the Federal Reserve to raise rates.
An increase to the benchmark interest rate raises borrowing costs for consumers and businesses, which in theory should slash inflation by slowing the economy and eating away at demand. That means borrowers will face higher costs for everything from car loans to credit card debt to mortgages. But the approach risks pushing the economy into a recession.
The latest rate hike is set to arrive as mixed economic data shows a country buoyed by robust hiring and retail sales, despite several rate hikes so far this year meant to slow economic activity. The U.S. saw stronger than expected job growth in June, as the economy added 372,000 jobs and the unemployment rate remained at 3.6%.
Other indicators, however, such as flagging consumer confidence and slowing home sales, suggest the economy has begun to weaken.
U.S. consumer confidence fell this month to a level not seen for one-and-a-half years, according to a closely followed Conference Board survey released on Tuesday. Meanwhile, in June, existing home sales plummeted 5.4% compared with the month prior — the fifth straight month of decline, according to data released last week by the National Association of Realtors.
If the Fed raises interest rates too quickly, an abrupt economic slowdown could send the economy into a downturn, Andrew Levin, a former Fed economist and a professor at Dartmouth College, told ABC News.
“There are definitely some indicators now that the economy is slowing,” he said.
“The question for the Fed is: Are we really heading into a recession?” he added. “If so, is that going to slow the Fed’s efforts to fight inflation?”
The anticipated 0.75% rate hike would raise the Fed’s benchmark interest rate to a range of 2.25% to 2.5%.
On Thursday, a day after the Federal Reserve announcement, a federal agency will release gross domestic product data that shows whether the U.S. economy grew or contracted over the three-month period ending in June.
Because the economy shrank at an annual rate of 1.4% over the first three months of the year, a contraction in the second three-month period would establish two consecutive quarters of falling GDP, which many consider a shorthand benchmark for a recession.
The National Bureau of Economic Research, or NBER, a research organization seen as an authority on measuring economic performance, uses a more complicated definition that takes into account several indicators. This definition determines whether a downturn is formally designated as a recession, since the NBER is the official arbiter on the subject.
Copyright © 2022, ABC Audio. All rights reserved.