Inflation and the Fed - More Rate Hikes and a Soft Landing

Inflation remains high and the Federal Reserve is on a mission to get it under control. So far this year, they've raised rates four times; with six more hikes expected in 2022.

Economists agree that it can be a challenging task for central banks to engineer soft landings, since there is always the chance that economic models and projections may not be accurate or an external shock could cause inflation to surge.

1. More Rate Hikes Could Lead to a Recession

In an effort to control high inflation and keep the US economy out of recession, the Federal Reserve has raised interest rates a record seven times this year. This has caused considerable concern among investors, economists and consumers.

The Fed is seeking to curb spending by making it more costly for prospective borrowers to obtain mortgages or take out money on car, business or student loans. Hopefully this will reduce spending and push prices down.

But higher borrowing costs may also cause slower economic growth and reduced demand for goods, potentially pushing the economy into a recession.

If this occurs, it could potentially cause a downturn in the global economy that relies on trade and investment. Furthermore, rising money costs could restrict spending abroad and hinder US growth.

Some economists worry that further rate hikes would conflict with the Fed's desire for a smooth transition.

Idealistically, the Fed should gradually raise rates this year to slow inflation without sending the US economy into a recession. But in practice, they have been doing so too quickly this year and there is mounting evidence that they may continue doing so until either late this year or early next year.

Some economists, including National Retail Federation chief Jack Kleinhenz, worry that the Fed's efforts to control price increases by raising interest rates may also heighten the danger of a recession. In his monthly review, Kleinhenz writes:

"It is impossible to predict whether the Fed's actions will lead to a recession or how severe one might be if one does occur, but continuing rate hikes increase the probability," he wrote.

This week, the Fed's policy-setting committee increased its benchmark rate by half a percentage point and forecast that they will keep on raising until eventually they reduce interest rates again. According to one average forecast for the Fed funds rate - which sets borrowing costs - it is projected that it will reach its peak of 3.8% in March 2023 before declining back down to 3% at year's end and 2.9% by 2024.

2. More Rate Hikes Could Lead to a Slowdown

Last year, the Fed tightened its monetary policy and made borrowing more expensive. As a result, businesses were forced to slow their spending, which in turn reduced demand for goods and services and ultimately lower prices for consumers.

Experts warn against raising rates too quickly, as doing so could stall the economy and possibly trigger a recession.

Experts predict that the Federal Reserve's monetary tools are intended to reduce inflation, or the rise in prices of goods and services. Eventually, experts believe they will be able to restore inflation back to a normal rate.

But the Fed's tools to combat inflation also create conditions that could force businesses to cut jobs, leading to an increase in unemployment rates. If businesses reduce production and wages, they must also cut back on hiring as well.

Thomas Gapen, director of research for the National Bureau of Economic Research, warns that cutting back on production could cause an economic slowdown and eventually a recession. Companies cutting back will reduce their output, leading to less demand for goods and services.

Furthermore, higher interest rates could make it harder for companies to borrow and invest, possibly leading them to reduce production or wages. Eventually this could cause an economic slowdown to a point where businesses cannot afford to continue operating.

As for the markets, a slowdown in economic activity and a recession could cause further stock losses. Investors may feel compelled to sell stocks, potentially pushing the market into bear territory. This could result in further reductions of stock portfolios, 401(k)s and cryptocurrency holdings which could delay any eventual recovery in prices.

3. More Rate Hikes Could Lead to Higher Inflation

Inflation is an increase in consumer prices that can be detrimental to business. To combat inflation, the Fed is taking various policy actions such as raising interest rates and expanding money supply (buying more Treasury debt).

But higher interest rates can also cause inflation. This is because they suppress demand by depressing current prices, but in the long run, higher rates cause expected inflation to increase.

When the Fed raises rates, it does so to curb inflation. Their goal is for inflation to not exceed 2% annually; however, prices have been rising much faster than that recently.

Policymakers are uncertain if they can control inflation without further tightening monetary policy. They've raised rates several times this year and could do so again.

Finally, however, there is no one-size-fits all solution. In certain instances, rapid rate hikes may be the best way to contain inflation; however, in others it may be beneficial to slow the rate increase pace and wait for higher prices to stabilize.

The Fed believes it can control inflation through aggressive rate hikes and a willingness to cut back on purchases of Treasurys and mortgage-backed securities. It anticipates making at least five 25 basis point rate increases in 2022.

Inflation is a key concern for the Federal Reserve, as it can significantly impact economic growth and unemployment. A recent study revealed that every percentage point decrease in the Federal Reserve's key interest rate lowers economic output in wealthy nations by 0.5%, but has greater effects on poorer nations.

However, if the Fed raises rates too quickly, it could stall growth and employment. This could potentially lead to a recession--not ideal for the economy.

But if the Fed can slow its rate hike pace and delay cutting back on purchases, it may be able to achieve a soft landing. This would involve slower growth and fewer job openings while still keeping inflation stable.

Although some in the Fed appear optimistic, it remains to be seen if their hawkish policies will have any real impact on slowing inflation. While they have made some progress toward their 2% target, inflation still hasn't yet been achieved.

4. More Rate Hikes Could Lead to Higher Unemployment

When the Fed raises interest rates, it becomes more costly to borrow money. This could cause lower consumer demand and slow economic activity. Companies may begin cutting their workforces or laying off employees, potentially impacting unemployment rates.

One of the primary reasons the Fed has raised rates so many times is to try and curb inflation. This has become the fastest rate in decades, and they want it back down to their 2% target. Unfortunately, inflation has become so high that it's preventing economic growth.

Further rate hikes could result in higher unemployment. This is because raising interest rates makes borrowing more expensive, leading to caution among consumers and businesses when spending money - potentially leading to a recession.

As more people lose their jobs or fear for their futures, they may begin to cut back on spending, slowing the economy down. As a result, some analysts speculate that an economic downturn may occur if interest rates keep being raised by the Fed.

However, more rate hikes could make it harder for the Fed to regulate inflation as prices keep climbing. This poses a problem as their objective is to bring down inflation without creating an economy that grows at a slower rate.

If the Fed continues to raise rates, mortgage rates could also rise. This could cause people to postpone purchasing homes or builders to put off construction projects.

This could have a major effect on the housing market and even lead to more unemployment, as more people find themselves unable to purchase homes and must seek other employment options.

In the past year, the Federal Reserve has raised rates eight times to combat inflationary pressures. Their aim is to bring down prices and restore inflation back to 2% - this will enable economic growth at a sustainable pace.

But a rate hike can also cause joblessness to rise, as it makes it more challenging for dominant employers to hire new personnel. As a result, fewer people will be able to secure employment and an extensive portion of the labor force may not be accessible for companies in need of new recruits.