The Federal Reserve is poised to deploy another supersized interest rate hike to fight the sharpest price surge in 40 years, a move that has drawn remarkably little political pushback despite rising market anxiety just weeks before an election.

That could change, with more and more voices from Washington to Wall Street warning that the central bank might end up doing serious damage to the economy.

The World Bank last week raised the specter of a global recession, driven by higher rates in the U.S. and abroad. Investors are increasingly worried that disruption in the U.S. government debt market could worsen as the Fed raises borrowing costs. The housing and stock markets are reeling. And some executives like Tesla CEO Elon Musk even say the economy is in danger of entering a period of deflation.

Fed Chair Jerome Powell has pledged to do whatever it takes to curb inflation, a point that he’ll punctuate on Wednesday when the central bank raises interest rates for the fifth time this year. The job seems nowhere near done, with the costs of everything from health care to rents soaring even as gas prices fall. But the Fed’s policies take time to feed through the economy, meaning the central bank could end up depressing economic activity more than necessary before realizing it, given the sheer speed at which it’s jacking up rates — the fastest pace in three decades.

“There’s the old expression that sometimes they’ll tighten until something breaks,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “It’s a legitimate concern at this point.”

The predicament creates an exceptional level of economic uncertainty for the country, for President Joe Biden’s administration, and for the next election cycle leading into 2024.

Economists say the range of outcomes for the second half of Biden’s presidency is astoundingly broad — it could see a severe economic downturn or simply a period of sluggish growth. Prices might continue to rise at a painfully rapid clip, or they could begin to drop.

Also at stake is the central bank’s own credibility as the nation’s chief inflation-fighting authority. Powell has stressed the dangers of backing off too early, fearing that doing so could make inflation even harder to fight long-term as consumers and businesses build ever-rising prices into their budgeting. So far, he has gotten strong political support, including from Biden and most Republicans.

But many Fed watchers say some of the root causes of inflation lie outside the central bank’s control, like the U.S. labor shortage, global supply chain snags and Russia’s war on Ukraine. They’re raising concern that higher rates could crimp growth without leading to much relief on prices — a point that Sen. Elizabeth Warren (D-Mass.) has hammered away at Powell for months.

“We just don’t know if the Fed rate hikes are going to be successful,” said Nancy Davis, founder of hedge fund Quadratic Capital Management. She argued that markets are “really complacent” in …read more

https://www.politico.com/news/2022/09/21/federal-reserve-rate-hike-inflation-00057885