Economists are expecting a big Federal Reserve rate hike on Wednesday, the latest in a series of increases in borrowing costs as the central bank tries to reduce near-historic inflation while avoiding a recession.
The Fed will likely raise the benchmark interest rate by 0.75%, repeating 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 prices jumped 9.1% in June. This rate of inflation, last seen more than four decades ago, has put additional pressure on the Federal Reserve to raise rates.
A rise in the benchmark interest rate raises borrowing costs for consumers and businesses, which in theory should reduce 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 this approach risks plunging the economy into a recession.
The latest rate hike is expected to come as mixed economic data shows a country supported by robust hiring and retail sales, despite several rate hikes so far this year intended to slow economic activity. The United States experienced stronger-than-expected employment growth in June, as the economy added 372,000 jobs and the unemployment rate remained at 3.6%.
Other indicators, however, such as declining consumer confidence and slowing home sales, suggest the economy has begun to weaken.
US consumer confidence fell this month to a level not seen in a year and a half, according to a widely followed Conference Board survey published on Tuesday. Meanwhile, in June, sales of existing homes fell 5.4% from the previous month – the fifth consecutive month of decline, according to data released last week by the National Association of Realtors.
If the Fed raises interest rates too quickly, a sharp economic downturn could send the economy into a slowdown, Andrew Levin, a former Fed economist and professor at Dartmouth College, told ABC News.
“There are definitely indicators now that the economy is slowing down,” he said.
“The question for the Fed is, are we really headed for a recession?” he added. “If so, will this slow the Fed’s efforts to fight inflation?”
The anticipated 0.75% rate hike would bring the Fed’s benchmark interest rate to a range of 2.25% to 2.5%.
On Thursday, a day after the Federal Reserve’s announcement, a federal agency will release gross domestic product data showing whether the US economy grew or contracted in the three months to June.
Given that the economy contracted at an annual rate of 1.4% in the first three months of the year, a contraction in the second three-month period would establish two consecutive quarters of GDP decline, which many consider a shorthand benchmark for a recession.
The National Bureau of Economic Research, or NBER, a research organization considered an authority on measuring economic performance, uses a more complicated definition that takes into account multiple indicators. This definition determines whether a downturn is formally designated as a recession, since the NBER is the official arbiter in the matter.