Why the Fed Is Risking a Recession

on Jun22
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Recession fears are ramping up as the Federal Reserve embarks upon an aggressive campaign to raise interest rates, and politicians and members of the public are increasingly questioning why central bankers are planning to cause the economy pain.

The short answer is: This is the tool the Fed has to bring inflation under control.

The central bank is trying to force price increases to slow down. It does that by raising interest rates, which makes mortgages, car loans and business borrowing more expensive. As money becomes pricier, it weighs on spending and hiring, weakening the job market and the broader economy — maybe notably. Slower growth will give supply a chance to catch up with demand.

The adjustment process is already an unpleasant one: Stock prices have fallen, home sales are beginning to slow and unemployment is likely to rise. But the Fed has one way to beat inflation back in line, and that is by hammering households and companies until they stop spending so much. Central bankers have acknowledged that the transition could be bumpy and that a recession is a real risk.

“Monetary policy is famously a blunt tool,” Jerome H. Powell, the Fed chair, said during testimony before senators on Wednesday. “There’s risk that weaker outcomes are certainly possible, but they are not our intent.”

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