Battling to Tamp Down Inflation, Fed Gears Up for Another Big Interest Rate Hike


The Federal Reserve is expected to announce Wednesday another aggressive interest rate increase as the central bank presses its attack on inflation despite rising risks of triggering a recession.

Most analysts expect a hefty  increase of three-quarters of a percentage point in the Fed's benchmark rate, which would be the second such move in two months  aimed at further cooling the economy to help reduce  pricing pressures.

The  Fed's effort to steer between a rock and a hard place is turning up the political heat, especially for Democrats, because voters in the upcoming congressional elections are not going to like either a continued rise in prices or a downturn that would cost jobs and other unwelcome consequences.

If there is a bright spot for President Biden and his party, it lies in an economic indicator that most Americans don't usually pay much attention to: the value of the dollar against foreign currencies.

One offshoot of the Fed's rate-hike campaign has been a surge in the value of the dollar, which is making products from Europe, Asia and other parts of the world cheaper for American consumers.

Since the U.S. buys trillions of dollars in imported products each year — including clothing, electronics, flowers and fresh vegetables — the stronger dollar is starting to make it a little easier for shoppers to deal with inflation for some goods.

"That's one of the very few forces working against food price inflation," said Ricky Volpe, an agribusiness professor at Cal Poly San Luis Obispo.

Carl Tannenbaum, chief economist at Northern Trust, said lower-priced imports will provide a relatively small but measurable help in lowering the rate of U.S. inflation, which hit 9.1% in June.

The downside for American corporations is that their exports and sales overseas will take a hit.

And the stronger dollar, Tannenbaum said, is inflicting real pain on many developing countries as they face bigger dollar payments for debt and commodities.

Still, for American voters, a decline in import prices, along with companies like Walmart now starting to mark down merchandise due to excess inventory and slowing demand, could provide some relief from the decades-high inflation, especially for food and gas.

On Thursday, the government is expected to release data showing the U.S. economy declined in the second quarter, after earlier reports of shrinking activity in the first quarter. Republicans are likely to jump all over the news, as back-to-back quarters of falling real gross domestic product, or economic output, is commonly seen as evidence of a recession.

An official determination of a recession is based on an array of data, and most economists say that while two negative quarters of GDP might constitute a "technical recession," the U.S. doesn't appear to be in an outright downturn at the present moment. Employment thus far has held up well and the picture of consumer spending, which accounts for two-thirds of economic activity, is mixed.

GDP in the current third quarter, for now, looks lackluster. And what happens over the rest of the summer and beyond will depend at least in part on what the Fed does and how people react to its efforts to get inflation under control.

If the Fed announces a three-quarter-point rate hike Wednesday, it will have been the fourth increase this year and will lift its benchmark rate to nearly 2.5%, a level that's considered neutral — that is, neither stimulative nor restrictive to the economy.

The question now is, how much more will the central bank do? In their June forecast, Fed officials projected the main rate to end the year at nearly 3.5%. And Fed Chair Jerome H. Powell could provide more guidance at a news conference Wednesday afternoon after the release of the policy statement.

But there are number of factors that will influence inflation and growth, and which are highly uncertain and largely beyond the Fed's control, including the war in Ukraine, the global economic situation and pandemic lockdowns in China.

Supply chain problems at ports and in other parts of the logistics system have eased somewhat in recent weeks, but there's still a shortage of parts and goods, particularly for new autos.

And it will take time before the backlog of orders is cleared  and companies adjust to shifting supply chains, said Shawn DuBravac, an economist and president of Avrio Institute, a consulting firm. But, he said, with demand slowing and high inventories of things like apparel, many more businesses don't have the pricing power they had at the start of the year.

In recent days, some of the biggest companies, including Microsoft, General Motors, Alphabet and Walmart, have reported lower profits. And companies in banking, housing and some other sectors have cut their outlook and are shedding jobs.