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By Christopher Rugaber<\/div><\/div>\n

Analysts expect the Fed to raise its benchmark short-term interest rate by a half-percentage point, the sharpest rate hike since 2000, with more soon to follow.<\/span><\/span><\/span><\/p>\n<\/div>\n

WASHINGTON (AP) \u2013 The\u00a0Federal Reserve\u00a0is poised this week to accelerate its most drastic steps in three decades to attack inflation by making it costlier to borrow \u2013 for a car, a home, a business deal, a credit card purchase \u2013 all of which will compound Americans\u2019 financial strains and likely weaken the economy.<\/span><\/span><\/span><\/p>\n

Yet with inflation having surged to a 40-year high, the Fed has come under extraordinary pressure to act aggressively to slow spending and curb the price spikes that are bedeviling households and companies.<\/span><\/span><\/span><\/p>\n

After its latest rate-setting meeting ends Wednesday, the Fed will almost certainly announce that it\u2019s raising its benchmark short-term interest rate by a half-percentage point \u2013 the sharpest rate hike since 2000.\u00a0The Fed\u00a0will likely carry out another half-point rate hike at its next meeting in June and possibly at the next one after that, in July. Economists foresee still further rate hikes in the months to follow.<\/span><\/span><\/span><\/p>\n

What\u2019s more, the Fed is also expected to announce Wednesday that it will begin quickly shrinking its vast stockpile of\u00a0Treasury\u00a0and\u00a0mortgage\u00a0bonds beginning in June \u2013 a move that will have the effect of further tightening credit.<\/span><\/span><\/span><\/p>\n

Chair\u00a0Jerome Powell\u00a0and the Fed will take these steps largely in the dark. No one knows just how high the central bank\u2019s short-term rate must go to slow the economy and restrain inflation. Nor do the officials know how much they can reduce the Fed\u2019s unprecedented\u00a0$9 trillion\u00a0balance sheet before they risk destabilizing financial markets.<\/span><\/span><\/span><\/p>\n

\u201cI liken it to driving in reverse while using the rear-view mirror,\u201d said\u00a0Diane Swonk, chief economist at the consulting firm\u00a0Grant Thornton. \u201cThey just don\u2019t know what obstacles they\u2019re going to hit.\u201d<\/span><\/span><\/span><\/p>\n

Yet many economists think the Fed is already acting too late. Even as inflation has soared, the Fed\u2019s benchmark rate is in a range of just 0.25% to 0.5%, a level low enough to stimulate growth. Adjusted for inflation, the Fed\u2019s key rate \u2013 which influences many consumer and business loans \u2013 is deep in negative territory.<\/span><\/span><\/span><\/p>\n

That\u2019s why Powell and other Fed officials have said in recent weeks that they want to raise rates \u201cexpeditiously,\u201d to a level that neither boosts nor restrains the economy \u2013 what economists refer to as the \u201cneutral\u201d rate. Policymakers consider a neutral rate to be roughly 2.4%. But no one is certain what the neutral rate is at any particular time, especially in an economy that is evolving quickly.<\/span><\/span><\/span><\/p>\n

If, as most economists expect, the Fed this year carries out three half-point rate hikes and then follows with three quarter-point hikes, its rate would reach roughly neutral by year\u2019s end. Those increases would amount to the fastest pace of rate hikes since 1989, noted\u00a0Roberto Perli, an economist at\u00a0Piper Sandler.<\/span><\/span><\/span><\/p>\n

Even dovish Fed officials, such as\u00a0Charles Evans, president of the\u00a0Federal Reserve Bank of Chicago, have endorsed that path. (Fed \u201cdoves\u201d typically prefer keeping rates low to support hiring, while \u201chawks\u201d often support higher rates to curb inflation.)<\/span><\/span><\/span><\/p>\n

Powell said last week that once the Fed reaches its neutral rate, it may then tighten credit even further \u2013 to a level that would restrain growth \u2013 \u201cif that turns out to be appropriate.\u201d Financial markets are pricing in a rate as high as 3.6% by mid-2023, which would be the highest in 15 years.<\/span><\/span><\/span><\/p>\n

Expectations for the Fed\u2019s path have become clearer over just the past few months as inflation has intensified. That\u2019s a sharp shift from just a few month ago: After the Fed met in January, Powell said, \u201cIt is not possible to predict with much confidence exactly what path for our policy rate is going to prove appropriate.\u201d<\/span><\/span><\/span><\/p>\n

Jon Steinsson, an economics professor at the\u00a0University of California,\u00a0Berkeley, thinks the Fed should provide more formal guidance, given how fast the economy is changing in the aftermath of the pandemic recession and\u00a0Russia\u2019s\u00a0war against\u00a0Ukraine, which has exacerbated supply shortages across the world.\u00a0The Fed\u2019s\u00a0most recent formal forecast, in March, had projected seven quarter-point rate hikes this year \u2013 a pace that is already hopelessly out of date.<\/span><\/span><\/span><\/p>\n

Steinsson, who in early January had called for a quarter-point increase at every meeting this year, said last week, \u201cIt is appropriate to do things fast to send the signal that a pretty significant amount of tightening is needed.\u201d<\/span><\/span><\/span><\/p>\n

One challenge the Fed faces is that the neutral rate is even more uncertain now than usual. When the Fed\u2019s key rate reached 2.25% to 2.5% in 2018, it triggered a drop-off in home sales and financial markets fell. The Powell Fed responded by doing a U-turn: It cut rates three times in 2019. That experience suggested that the neutral rate might be lower than the Fed thinks.<\/span><\/span><\/span><\/p>\n

But given how much prices have since spiked, thereby reducing inflation-adjusted interest rates, whatever Fed rate would actually slow growth might be far above 2.4%.<\/span><\/span><\/span><\/p>\n

Shrinking the Fed\u2019s balance sheet adds another uncertainty. That is particularly true given that the Fed is expected to let\u00a0$95 billion\u00a0of securities roll off each month as they mature. That\u2019s nearly double the\u00a0$50 billion\u00a0pace it maintained before the pandemic, the last time it reduced its bond holdings.<\/span><\/span><\/span><\/p>\n

\u201cTurning two knobs at the same time does make it a bit more complicated,\u201d said\u00a0Ellen Gaske, lead economist at PGIM Fixed Income.<\/span><\/span><\/span><\/p>\n

Brett Ryan, an economist at Deutsche Bank, said the balance-sheet reduction will be roughly equivalent to three quarter-point increases through next year. When added to the expected rate hikes, that would translate into about 4 percentage points of tightening through 2023. Such a dramatic step-up in borrowing costs would send the economy into recession by late next year, Deutsche Bank forecasts.<\/span><\/span><\/span><\/p>\n

Yet Powell is counting on the robust job market and solid consumer spending to spare the\u00a0U.S.\u00a0such a fate. Though the economy shrank in the January-March quarter by a 1.4% annual rate, businesses and consumers increased their spending at a solid pace.<\/span><\/span><\/span><\/p>\n

If sustained, that spending could keep the economy expanding in the coming months and perhaps beyond.<\/span><\/span><\/span><\/p>\n

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\nAuthor: marlam<\/p>\n","protected":false},"excerpt":{"rendered":"