After a Big Rate Increase, Markets Fear a Recession

The forecast calls for pain

For a third straight meeting, the Fed raised its benchmark interest rate by 75 basis points — and it’s hardly done. Count on an additional 1.25 percentage points’ worth of increases this year, the Fed chair Jay Powell said yesterday, which would bring the Fed funds rate to 4.4 percent by the end of 2022, and 4.6 percent next year.

The effects of this rapid-fire tightening — there’s a wide consensus expecting yet another 75-basis-point increase in November — will be felt across the labor, housing and stock markets, economists warn. Here’s what to watch for:

Recession: By raising borrowing costs, central banks across the developed world are hoping to cool an inflation rate that’s running at 40-year highs. “I wish there were a painless way to do that,” Powell said at yesterday’s news conference. “There isn’t.” At no point did Powell say a recession was his base-case projection, though economists at Nomura expect the U.S. to enter one this year.

Layoffs: The Fed now sees the unemployment rate rising to 4.4 percent next year, up from 3.7 percent now. That would mean the loss of 1.2 million jobs, Omair Sharif, founder of Inflation Insights, told The Times’s Jeanna Smialek. “The U.S. economy has entered a recession every time the unemployment rate has risen by at least 50bp [basis points] in the last 75 years,” Michael Gapen, the chief U.S. economist at Bank of America, wrote in a note to clients.

Article source: https://www.nytimes.com/2022/09/22/business/dealbook/fed-latest-rate-increase-odds-recession.html