The Federal Reserve is expected to order another big boost in interest rates Wednesday, as questions bubble up about how much higher borrowing costs will have to go before stubborn inflation starts to come down.
The central bank has already raised its benchmark interest rate by 3 percentage points since March, and it's expected to tack on another 3/4 of a point at this week's meeting. That's the most aggressive string of rate hikes in decades, but so far it's done little to bring prices under control.
"Interest rates have risen at a whiplash-inducing speed, and we're not done yet," said Greg McBride, chief financial analyst at Bankrate. "It's going to take some time for inflation to come down from these lofty levels, even once we do start to see some improvement."
Annual inflation in September was 6.2 percent, according to the Fed's preferred yardstick — unchanged from the month before. The better known consumer price index shows prices rising even faster, at an annual rate of 8.2 percent.
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"The Fed looks at a number of different inflation barometers, and none of them is really moving in the right direction," McBride said.
It's possible that Wednesday's rate hike will be the last super-sized increase for a while. Markets will be on the lookout for any signal that the Fed plans to scale back to a smaller increase in December. But McBride argues that in order to curb inflation, borrowing costs will likely have to remain elevated for an extended period.
"The mantra for 2023 is 'higher for longer,'" he said. "When inflation's been running at 6, 7, 8 percent and the target is 2 percent, it's going to take a while."
Rate hikes are having an effect, even if inflation remains untamed
Higher borrowing costs have already put a big dent in the housing market. And other parts of the economy are beginning to slow. But consumers, still flush with cash saved up early in the pandemic, continue to spend money. As a result, the Fed may have to tap the brakes harder, for longer, than it otherwise would.
"We see today that there is a bit of a savings buffer still sitting for households, that may allow them to continue to spend in a way that keeps demand strong," said Esther George, president of the Federal Reserve Bank of Kansas City. "That suggests we may have to keep at this for a while."
Like her colleagues on the Fed's rate-setting committee, George has expressed a determination to control inflation. But she's also cautioned against raising rates too rapidly at a time of economic uncertainty.
"I have been in the camp of steadier and slower [rate increases], to begin to see how those effects from a lag will unfold," George said last month. "My concern being that a succession of very super-sized rate hikes might cause you to oversteer and not be able to see those turning points."
With polls showing inflation is a top concern among voters, the Biden administration and most members of Congress have stayed out of the Fed's way as it tries to control prices. But a handful of Democrats have begun to challenge the central bank's approach, warning that aggressive rates hikes could put millions of people out of work.
"We are deeply concerned that your interest rate hikes risk slowing the economy to a crawl while failing to slow rising prices that continue to harm families," Sen. Elizabeth Warren, D-Mass., and colleagues wrote in a letter Monday to Fed chairman Jerome Powell.
The housing market has already slowed to a crawl, as mortgage rates top 7 percent for the first time in two decades.
Kansas City homebuilder Shawn Woods said his company has gone from selling a dozen houses a month before the Fed started raising rates to fewer than five.
"Never in my wildest dreams would I have thought we'd go from 3 percent [mortgage rates] to 7 percent within six months," said Woods, president of Ashlar Homes and the Home Builders Association of Kansas City.
"I think we're in for a rough six or eight months," Woods said. "Typically, housing leads us into downturns and it leads us out of downturns. And I think from a housing perspective, we've probably been in a housing recession since March or April."
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