Federal Reserve Likely to Raise Rates as Stagflation Risks Intensify

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Federal Reserve Likely to Raise Rates as Stagflation Risks Intensify
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Since the Federal Reserve first kicked off its inflation-fighting campaign 15 months ago, it has raised interest rates nine consecutive times and wound down its pandemic-era bond-buying program, notching the fastest pace of monetary policy tightening in four decades. So far, it has achieved a balance that its critics thought nearly impossible, cutting headline price growth nearly in half while keeping the U.S. economy humming.Since the Federal Reserve first kicked off its inflation-fighting campaign 15 months ago, it has raised interest rates nine consecutive times and wound down its pandemic-era bond-buying program, notching the fastest pace of monetary policy tightening in four decades. So far, it has achieved a balance that its critics thought nearly impossible, cutting headline price growth nearly in half while keeping the U.S. economy humming.

The problem is that the job is far from over, and the most difficult days lie ahead. As the central bank’s policy committee gears up for its May 2-3 meeting and what is widely expected to be a 10th rate hike, it will be embarking on a new and more volatile phase in its tightening cycle, marked by far less clarity than what has come before. The risk of a misstep is growing, and the consequences of over- or undershooting would be severe.

The central challenge for the Fed is that the economic outlook is souring at the same time that progress on reining in inflation is stalling out. Economic growth in the first quarter decelerated more than expected, data out this past week showed, while the Fed’s preferred inflation gauge is down less than a full percentage point from its peak and still more than double the bank’s 2% inflation target. 

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