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Sept. 26, 2022, 2:56 p.m. EDT

‘Financial markets are throwing in the towel’: Recession fears escalate as Fed slams brakes on the economy

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By Jeffry Bartash

The likelihood of sharply higher interest rates has tilted the odds toward another recession within a year, economists say. Yet some still hold out hope the U.S. can muddle through with a period of slow growth instead of outright decline.

In a move widely expected by financial markets, the Federal Reserve orchestrated another j umbo-size hike in U.S. interest rates last week . What was unexpected was the central’s bank aggressive forecast for even higher rates in the year ahead.

The surprise forecast triggered a major decline in the stock market /zigman2/quotes/210598065/realtime DJIA -1.40% /zigman2/quotes/210599714/realtime SPX -1.79% as the realization sank in that the Fed is determined to squelch the highest U.S. inflation in 40 years — no matter the cost.

And the cost seems increasingly likely to be a recession, analysts say.

The risk  of a recession over the next year “has now climbed above 50%,” said chief economist Douglas Porter of BMO Capital Markets. “This more aggressive series of rate hikes will weigh more heavily on the U.S. economy.”

Business leaders appear worried, too. A survey of chief investment officers shows 72% think higher rates will lead to recession, the financial-research firm Grant Thornton found.

The Fed last week raised a key short-term interest rate by three-quarters of a percentage point, to a top range of 3.25%, and forecast increases of another 1.25 points by year’s end, bringing the fed-funds rate as high as 4.5%.

That’s not all. The Fed predicted its benchmark short-term rate would climb to as high as 4.75% in 2023 — and perhaps go even higher — in a frontal assault on inflation. Inflation has surged as high as 9.1% from less than 2% two years ago.

“I wish there was a painless way to do that,” Fed Chair Jerome Powell said after the announcement of the latest rate hike on Sept. 21. “There isn’t.”

Higher interest rates typically slow an economy by making it more expensive for people and businesses to borrow money.

So far, most of the pain caused by higher rates has been experienced by new and potential home buyers. The rate on a 30-year mortgage , for instance, is shooting toward 7% from less than 3% a year ago. Home sales have since slowed.

Read: ‘They’re waiting to see if home prices fall’: Home buyers are backing out of contracts in the Sun Belt at a record rate

Higher rates also mean it costs more to buy a car, replace an appliance, do home repairs or keep unpaid balances on a credit card.

If consumers cut back on spending, businesses are likely to respond as they usually do by putting a halt to hiring or even laying off workers. They’ll also borrow less and put off new investments.

The result: economic “pain,” just as Powell predicted.

“The Fed likely has to accept a prolonged slowing in the economy, if not a mild recession,” said chief economist Steven Ricchiutto of Mizuho Securities in a note to clients. 

Also read: The stock market is ‘on cusp’ of an important test: Watch this S&P 500 level if 2022 low gives way, says RBC

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US : S&P US
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