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The Federal Reserve has made it abundantly clear it will raise interest rates as much as necessary to curb inflation.
However, according to an Associated Press report, the nation’s monetary policy makers have had a tendency to “overshoot” when raising rates. While inflation is contained, rate hikes also serve as a brake on economic growth that can halt growth entirely, or even send the economy into a recession if raised too far.
That’s why stocks have been in a month-long tailspin as Fed Chairman Ben Bernanke talks tough on inflation. Yet even Wall Street economists expect Bernanke and other Fed officials to continue raising rates at their meeting June 28-29, and possibly at their August meeting as well.
“We disagree that more hikes are needed, but we also know that they’re coming,” said Michael Strauss, chief economist at Commonfund. “In fact, we believe if they go with a hike next week, that’ll be overkill. But we fully expect them to go not only next week, but probably in August, too.”
The nation’s benchmark interest rate currently stands at 5%, and is expected to be raised by a quarter percentage point next week. An August hike would put the rate at 5.5% — at which point Wall Street expects the Fed to signal that it will stop.
Of course, there was debate at the beginning of the year that Bernanke would stop at 4.75%. Higher-than-expected inflation data and higher-than-average commodity prices have led Fed policy makers to speak out, warning that inflation poses a longer-term threat to the economy than slower growth.
Another part of the equation is Bernanke’s need to establish his credibility as Fed chairman and as an inflation fighter.
“There’s a necessity of an incoming Fed chairman to maintain credibility, and talking tough on inflation is part of that,” said Anthony Chain, chief economist for JP Morgan Private Client Services and a former economist for the New York Federal Reserve Bank. “I’m inching and leaning toward them going with another rate hike in August.”