After raising interest rates again, Federal Reserve warns more hikes likely in 2023

After announcing another half-point interest rate hike, Federal Reserve Chair Jay Powell indicated more hikes are on the way in 2023. This comes as inflation shows signs of slowing gradually, but there are again concerns the Fed is not going to be able to tame it without triggering a recession. Economist Mohamed El-Erian joined Geoff Bennett to discuss.

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  • Judy Woodruff:

    After announcing another half-point hike today, Federal Reserve Chair Jay Powell indicated that more hikes are on the way in 2023 and a likely prolonged period of higher rates.

    This comes as inflation shows signs of slowing gradually. But there are again concerns that the Fed is not going to be able to tame inflation without triggering a recession.

    Geoff Bennett has the latest.

  • Geoff Bennett:

    Judy, today's rate hike is the seventh this year. Altogether, the Federal Reserve has now raised interest rates from just above zero earlier this year to just over 4 percent, its highest level in 15 years.

    Even though inflation has slowed, Fed Chairman Jerome Powell today explained why he believes more increases may be necessary next year.

  • Jerome Powell, Federal Reserve Chairman:

    The worst pain would come from a failure to raise rates high enough and from us allowing inflation to become entrenched in the economy, so that the ultimate cost of getting it out of the economy would be very high in terms of employment, meaning very high unemployment for extended periods of time.

    I wish there were a completely painless way to restore price stability. There isn't. And this is the best we can do.

  • Geoff Bennett:

    We're joined now by Mohamed El-Erian, president of Queens' College, Cambridge university, and chief economic adviser at Allianz.

    It's great to have you here.

  • Mohamed El-Erian, Chief Economic Adviser, Allianz:

    Thanks for having me.

  • Geoff Bennett:

    So, the Fed's rate projections show no cuts in 2023, which is a contrast from what many people expected ahead of today's announcement.

    What's your assessment of what you heard from the Federal Reserve chairman today?

  • Mohamed El-Erian:

    I think they have realized that they are late. They have taken their peak rate up to 5.1 percent. So they're telling us they're going to do another 75 basis points.

    And what's most striking, Geoff, is, when they met three months ago, and provided their projection, not a single Fed official thought we would need to go above 5 percent. Today, just three months later, 17 out of 19 believe we should go above 5 percent.

    And it just shows you that they're playing catchup.

  • Geoff Bennett:

    Well, you say the Fed is late and addressing inflation. And you have also said that the Fed has contributed to undue market volatility.

    How so?

  • Mohamed El-Erian:

    Because it has been very slow in characterizing inflation initially.

    So, remember the whole of last year, they told us it was transitory, don't worry, it will go away by itself, you could look through it. And then, in November, they changed their mind, rightly so, and said, it's not transitory, but they didn't move in any meaningful way.

    So the market has had to adjust to that. And we have had quite a bit of volatility and quite a bit of asset value destruction in the marketplace, as the Fed embarked on what now is the most front-loaded hiking cycle for 40 years.

    This is meaningful, because we don't know what the impact on the economy is. The market right now is worried that the Fed is going to push us into recession.

  • Geoff Bennett:

    You use the R-word, recession. I mean, are we looking at a short and shallow recession or something worse than that?

  • Mohamed El-Erian:

    So, I hope we don't end up into a recession. I'm not in the camp that says it's 100 percent likely. It's probable, but it's not certain.

    But if we do fall into it, Geoff, it's very hard to assert that it will be short and shallow. Those who are saying it will be short and shallow with confidence are falling into the same trap as they did with transitory inflation, trying to make bad news good news. So I will tell you we're going through a recession, say, oh, don't worry, it's short and shallow.

    We don't know. And we have got to be very careful. But the major issue now is to avoid going into a recession.

  • Geoff Bennett:

    So what should the Fed do when inflation is so sticky, parked at 7 percent?

  • Mohamed El-Erian:

    That's the problem.

    Once you are in suboptimal world, there is no first best. That's the cost of being late. That's the cost of mischaracterizing inflation as transitory. It has no choice but to go further. And, unfortunately, there will be collateral damage. And I say this with a heavy heart because it was avoidable.

  • Geoff Bennett:

    And many Americans have, in many ways, become accustomed to paying higher prices in nearly every aspect of their lives.

    They're paying more in interest, in credit cards, in mortgages. What's next?

  • Mohamed El-Erian:

    So it's going to be mainly services. And the big question is going to be, will wages start moving up? And if they do, it's a double-edged sword.

    On the one hand it's good because people are protecting their purchasing power. On the other hand, if companies certainly just pass on the higher wages into higher prices, you have that risk of a wage-price cycle.

    Geoff, the one thing we have to remember is that, while we are all feeling inflation, it is hitting the hard — the poor particularly hard. This is not just an economic issue. This is a social issue. And it has, unfortunately, a lot of negative consequences.

  • Geoff Bennett:

    Indeed.

    Mohamed El-Erian is president of Queens' college, Cambridge University, and chief economic adviser at Allianz.

    Thanks so much for being with us.

  • Mohamed El-Erian:

    Thank you.

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