S&P 500 Falls Into Bear Market: Live Updates

Jeanna Smialek

Credit…Pete Marovich for The New York Times

The Federal Reserve is likely to discuss making its biggest interest-rate increase since 1994 when policymakers meet this week, as a range of new data suggest that inflation is coming in hotter and proving more stubborn than they had hoped.

The central bank will probably contemplate whether to raise interest rates by three-quarters of a percentage point on Wednesday, when they are set to release both their decision and a fresh set of economic projections.

The Fed raised rates by half a percentage point in May and officials had suggested for months that a similar increase would be warranted at their meetings in June and July if data evolved as expected. But inflation data has not come in as anticipated. Instead, a report last week showed that inflation re-accelerated in May and is running at the fastest pace since 1981. Two separate measures of inflation expectations, one out last week and one released Monday, showed that consumers are beginning to anticipate notably faster price increases.

That is sure to increase the sense of unease at the Fed, which is trying to quash high inflation before it changes behavior and becomes a more permanent feature of the economic backdrop. And the string of glum news has caused economists and investors alike to bet that the central bank will begin to raise interest rates at a more rapid clip to signal that it recognizes the problem and is making fighting inflation a priority.

“They’ve made it pretty clear that they want to prioritize price stability,” said Pooja Sriram, U.S. economist at Barclays. “If that is their plan, a more aggressive policy stance is what they need to be doing.”

Wall Street is bracing for interest rates to rise more than investors had anticipated just days ago, a reality that is sending stocks plummeting and is causing other markets to bleed. Investors now expect rates to climb to a range of 2.5 to 2.75 percent as of the Fed’s September gathering, suggesting central bankers would need to make one three-quarter-point move over the course of its next three meetings. The Fed hasn’t made such a large move since the early 1990s, and that 2.75 percent upper limit would be the highest the federal funds rate has been since the global financial crisis in 2008.

When the Fed lifts its policy interest rate, it filters through the economy to make borrowing of all kinds — including mortgage debt and business loans — more expensive. That slows down the housing market, keeps consumers from spending so much and cools off corporate expansions, weakening the labor market and broader economy. Slower demand can help price pressures to ease as fewer buyers compete for goods and services.

But interest rates are a blunt tool, so it is difficult to slow the economy with precision. Likewise, it is tough to predict how much conditions need to cool to bring inflation down convincingly. Supply issues tied to the pandemic could ease, allowing for a deceleration. But the war in Ukraine and China’s newly reimposed lockdowns meant to contain the coronavirus could keep prices elevated.

That is why investors and households increasingly fear that the central bank will set off a recession. Consumer confidence is plummeting, and a bond-market signal that traders monitor closely suggests that a downturn may be coming. The yield on the 2-year Treasury note, a benchmark for borrowing costs, briefly rose above the 10-year yield on Monday. That so-called inverted yield curve, when it costs more to borrow for shorter periods than longer periods, typically does not happen in a healthy economy and is often taken as a sign of an impending downturn.

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