More Pain Ahead as Fed Delivers Another Jumbo Rate Hike

Good Wednesday evening. On this date in 1937, J.R.R. Tolkien’s "The Hobbit" was first published. We’ve got somewhat less grand adventures happening today: Lawmakers are still wrangling over a funding bill that would avert a government shutdown at the end of the month, and former president Donald Trump got hit with fraud charges by New York State.

Here's what else is going on.

Fed Sees Unemployment Rising as It Raises Rates Again

As its battle against inflation continues, the Federal Reserve on Wednesday again raised a key interest rate by three-quarters of a percentage point, up to a range of 3% to 3.25%.

The third consecutive "jumbo" hike of seventy-five basis points was widely expected, and Fed officials’ outlook suggests another big increase could be in store at their next meeting in November, one of two remaining in 2022. According to projections released Wednesday, the central bankers now expect interest rates to end the year in a range of 4.25% to 4.5%, which some analysts think they could get to with an increase of 75 basis points in November and 50 basis points in December.

While emphasizing that all moves are data dependent, with decisions coming at the scheduled meetings and not before, Fed chief Jay Powell confirmed to reporters that he expects to see more rate hikes in the coming months, and that rates were "likely" to rise to a range near 4.6% before the increases are over.

"The FOMC is strongly resolved to bring inflation down to 2%, and we will keep at it until the job is done," Powell said of the rate-setting Federal Open Market Committee.

Economy slows, but inflation stays high: "Recent indicators point to modest growth in spending and production," the committee said in a statement. "Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures."

Fed officials now expect the economy to grow 0.2% this year and 1.2% in 2023, well below the long-run growth baseline of 1.8%, and a significant decline from projections made earlier this year. The slowdown in growth, already underway, is necessary, Powell said, to accomplish the task of getting inflation under control.

"What we hear from people when we meet with them is that they really are suffering from inflation," Powell said. "If we want to set ourselves up – really light the way to another period of very strong labor market, we have got to get inflation behind us. I wish there were a painless way to do that. There isn’t."

Recession coming? Powell said that as a result of the central bank’s tightening campaign, he expects to see a period of "below trend growth" that will cause an increase in unemployment — but that doesn’t necessarily mean there will be a recession.

"No one knows whether this process will lead to a recession or, if so, how significant that recession will be," he said. The Fed chair noted that many people still have excess savings built up during the pandemic and state governments are flush with cash, providing a cushion that should soften the blow of lower growth.

Still, the Fed chair made it clear that unemployment will have to increase to some degree. The "labor market continues to be out of balance," he said, and slower growth will necessarily push up the unemployment rate. Fed officials now expect the unemployment rate to rise to 4.4% in 2023 and remain at the level in 2024 before inching lower to 4.3% in 2025.

The fundamental goal, as Powell has stated many times, is to restore price stability to the economy. "Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy," he said. "Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all."

Some economists and politicians have their doubts. "Chair Powell just announced another extreme interest rate hike while forecasting higher unemployment," Sen. Elizabeth Warren (D-MA) tweeted. "I’ve been warning that Chair Powell’s Fed would throw millions of Americans out of work — and I fear he’s already on the path to doing so."

Bill Zox, a portfolio manager at Brandywine Global, told CNBC that he thinks the Fed will continue to raise rates "until something breaks" in the economy. "The Fed is not anywhere close to a pause or a pivot," Zox said. "They are laser-focused on breaking inflation. A key question is what else might they break."

The Wall Street Journal’s Nick Timiraos noted that the size of the increase in the unemployment rate now projected by the Fed is usually bad news for the overall economy. "That type of increase has seldom occurred without a recession," he wrote. The Washington Post’s Rachel Siegel said that when the unemployment rate rises by half a percentage point, a recession typically follows.

Recession or not, one thing that seems certain is that interest rates will go higher and stay there for longer than previously expected. Among other effects, the higher rates mean higher interest payments on the national debt. Analysts at the Committee for a Responsible Federal Budget said Wednesday that if interest rates are 75 basis points higher than currently projected over the next 10 years, the deficit will be $2.1 trillion larger than it would have been otherwise.

Dems Reach Deal on Police Funding, Public Safety Legislation

After months of negotiations to try to overcome divisions between moderates and progressives, House Democrats have reached a deal on a package of police funding and other public safety measures.

Majority Leader Steny Hoyer (D-MD) announced Wednesday afternoon that he would bring four public safety bills to the floor on Thursday.

The package includes:

* A bill to provide funding for smaller police departments (those with fewer than 200 officers);

* Legislation to support violence intervention initiatives;

* A plan to fund mental health professionals and have them respond to some emergencies;

* A bill to establish a Justice Department grant program to help police solve cases involving homicide and gun violence.

Why it matters: Moderate Democrats are eager to approve a legislative package that would help them fend off attacks that they are soft on crime or want to defund the police. Liberals say they were able to secure improvements to better target the funding and increase accountability. "With this package, House Democrats have the opportunity to model a holistic, inclusive approach to public safety, and keep our promise to families across the country to address this issue at the federal level," progressive Reps. Pramila Jayapal (WA) and Ilhan Omar (MN) said in a statement.

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