Happy Wednesday! Here’s what’s happening while we wait for the U.S. Women’s National Team to play the Netherlands tonight in a rematch of the 2019 World Cup final.
Fed Raises Rates to Highest Level in 22 Years as It Renews Inflation Fight
The Federal Reserve on Wednesday raised its benchmark interest rate by 25 basis points to a target range of 5.25% to 5.5% — its highest level since 2001. The Fed has now raised rates 11 times since March 2022 by a total of 525 basis points as part of its campaign to bring inflation under control.
The move was widely expected. The big question now is whether the Fed is finished or will raise rates yet again at its next meeting in September. As in the past, Fed officials said they would allow the economic data to determine what they do next.
“The Committee will continue to assess additional information and its implications for monetary policy,” the Federal Open Market Committee said in a statement. “In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
Most analysts are betting that the Fed is done and that the benchmark rate has reached its peak. As of Wednesday afternoon, investors were saying they see a roughly 78% chance that the Fed will hold steady on rates at its next meeting, according to the CME Group’s FedWatch Tool, which measures market expectations.
Still, the Fed did leave the door open to another rate hike if conditions warrant, and some analysts have warned that it is too early to declare victory in the battle against inflation. Speaking to reporters after the announcement, Fed Chair Jerome Powell said that inflation is still “well above” the central bank’s 2% goal. “We can afford to be a little patient, as well as resolute, as we let this unfold,” he added. “We think we’re going to need to hold, certainly, policy at restrictive levels for some time, and we’d be prepared to raise further if we think that’s appropriate.”
Will the Fed go too far? There is growing confidence that the Fed can pull off a much-discussed soft landing, pushing inflation levels back down close to 2% without causing a recession. At the same time, there are also worries that the Fed could overdo it in its desire to assert its credibility and ensure that the last embers of inflation have been extinguished.
“The improvement in inflation we have seen without a big increase in unemployment suggests that they may be able to get there with less pain than many thought,” said KPMG Chief Economist Diane Swonk. “The irony is that that sentiment actually increases the risks of an overshoot by the Fed.”
Some Democrats have been particularly vocal in their concerns. “The Fed’s extreme rate hikes risk throwing millions of Americans out of work,” said Sen. Elizabeth Warren. “Unemployment for Black workers is already rising at an alarming pace.”
Rep. Brendan Boyle, the senior Democrat on the House Budget Committee, also highlighted the risk that the Fed may be moving too aggressively. “Since 1961, the Fed has raised interest rates nine times to tame inflation – and ended up triggering a recession in eight of those nine cases,” he said in a statement. “Millions of jobs are on the line and this eleventh rate hike raises the risk of another over-correction. With the rate of inflation less than one point away from the Fed’s two percent target, our chief concern should be protecting American jobs and our historic recovery.”
Fed says no recession: Despite the concerns of some critics, Powell said that bank officials think the economy is strong enough to avoid a recession. "The staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession," he said. That reverses a call Fed economists made in March, when, following a round of bank failures, they started to predict a recession to arrive later this year.
And CBO agrees: A new analysis from the Congressional Budget Office backs up the Fed’s outlook. CBO estimates that the economy will grow at a 0.4% annual rate in the last six months of 2023, with growth picking up in 2024. Inflation will continue to fall, dropping below 3% by the start of next year. Unemployment is projected to rise amid higher interest rates, with the unemployment rate peaking at a relatively modest 4.8% in the fourth quarter of 2023.
Biden Taps a New Social Security Administration Chief
President Biden announced Wednesday that he intends to nominate former Maryland governor Martin O’Malley to head the Social Security Administration.
“Since Day 1 I have fought to strengthen and defend Social Security, which tens of millions of Americans have paid into and depend on to support their livelihoods,” Biden said in a statement. “I know that Governor O’Malley will continue to be a strong partner who works tirelessly to protect Social Security for generations to come.”
O’Malley served as the Democratic governor of Maryland from 2007 to 2015 and ran for the Democratic nomination for president as a younger and more liberal challenger to Hillary Clinton in 2016. If confirmed by the Senate, he would take over the agency responsible for distributing more than $1 trillion in annual benefits to the elderly and disabled at a time when it is beset by administrative, political and financial challenges.
Social Security — the largest single program in the federal budget — is on a path to see its combined trust funds depleted in about a decade, at which point benefits would be cut by 20% unless Congress intervenes. While President Joe Biden and Republicans agreed to take changes to Social Security off the table in their recent budget talks, some Republicans have proposed cuts to the program and budget watchdogs have repeatedly called for reforms to extend its solvency. The agency reportedly also faces reduced staffing and low morale among remaining employees, criticism of its customer service and questions about its management.
Biden praised O’Malley for his past efforts at making government “more accessible and transparent” and the White House called him a “pioneer of using performance-management and customer service technologies in government.”
But winning confirmation could itself be challenging for O’Malley and the administration; as Reuters’ Trevor Hunnicutt notes, “political partisanship has made confirming presidential nominees increasingly difficult.” On top of that, the agency’s leadership has been the subject of some political sniping. Social Security has been led by an acting commissioner, Kilolo Kijakazi, for the past two years after Biden fired the previous commissioner, Andrew Saul, a Trump holdover who served only two years of a six-year term that was supposed to last until 2025. Saul had clashed with labor unions, advocacy groups and Democrats on Capitol Hill and had refused a Biden administration request to resign.
Nancy Altman, the president of advocacy group Social Security Works, applauded the nomination. “Like President Biden, O’Malley supports expanding Social Security’s modest benefits, not cutting them,” she said in a statement. “At a time when Social Security is under attack from Republicans in Congress, O’Malley is the fighter that the American people need at SSA’s helm.”
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Fiscal News Roundup
- House GOP Notches Early Win in Bid to Unite Party on Spending — but Pitfalls Remain – Politico
- As Spending Fights Loom, Freedom Caucus Is at a Crossroads – New York Times
- A Dozen Moderate Republicans Are Still Digging In on an Abortion Pill Measure in a Key Spending Bill – Politico
- Biden Picks Martin O’Malley to Lead Social Security Administration – Washington Post
- Fed Raises Interest Rates to 22-Year High, Leaves Door Open for More – Bloomberg
- US Economy Will Skirt a Recession, Latest CBO Projections Show – Bloomberg
- Credit Markets Are Creaking, Creating Economic Uncertainty – New York Times
- House Democrats Introduce Bill to Expand Drug Price Negotiations – The Hill
- Senate Finance Committee Advances PBM Reform Bill – The Hill
- Mitch McConnell Freezes Mid-Sentence, Escorted Away at Press Conference – Washington Post
- NASA, Pentagon Award Contract to Build a Nuclear-Powered Rocket Engine – Washington Post
Views and Analysis
- Why Chances of a Shutdown Could Be Growing – Aris Folley, The Hill
- As Inflation Falls, GOP May Have to Rethink Attacks on Biden Economy – Jeff Stein, Washington Post
- 5 Takeaways as the Fed Reignites Its Inflation Fight – Taylor Giorno and Sylvan Lane, The Hill
- It’s Time for the Federal Reserve to Pause Interest Rate Hikes – Henry Olsen, Washington Post
- Companies Aren’t Eager to Cut Their Prices as Costs Fall – Peter Coy, New York Times
- It’s Time to End the ‘Era of the Great Distraction’ – George F. Will, Washington Post
- Student Debtors’ Faith in President Biden Is Tested – Emma J. Murphy, American Prospect