Conflicting signs about the health of the U.S. economy have thrust the Federal Reserve into a difficult spot. With inflation raging at a four-decade high, the job market strong and consumer spending still solid, the Fed is under pressure to raise interest rates aggressively. But other signs suggest the economy is slowing and might even have shrunk in the first half of the year. Such evidence would typically lead the Fed to stop raising rates — or even cut them. For now, though, the Fed is focused squarely on its inflation fight, and this week it’s set to announce another hefty hike in its benchmark interest rate. Together with its previous rate increases, the Fed’s moves will make borrowing costlier for individuals and companies and likely weaken the economy over time. “Until there’s very clear evidence of the labor market beginning to meaningfully deteriorate, the No. 1 focus for the Fed must be inflation,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. When it ends its latest policy meeting Wednesday, the Fed is expected to impose a second consecutive three-quarter-point hike, elevating its key rate to a range of 2.25% to 2.5%. It will be its fourth rate hike since March, when it announced a quarter-point increase. Since then, with inflation setting new four-decade highs, the central bank has tightened credit ever more aggressively. By raising borrowing rates, the Fed makes it costlier to take out a mortgage or an auto or business loan. In turn, consumers and businesses will likely borrow and spend less, cooling the economy and slowing price increases. The Fed’s hikes have already led to a doubling of the average rate on a 30-year fixed mortgage in the past year, to 5.5%, and home sales have tumbled. The central bank is betting it can slow growth just enough to tame inflation yet not so much as to trigger a recession — a risk that many analysts fear may end badly. The Fed’s rate hikes aren’t suited to address all the causes of high inflation. Higher borrowing rates can reduce spending. But they cannot reverse other factors, notably the global shortages of food, energy, factory parts and other items, which have been worsened by Russia’s war against Ukraine and COVID-19-related shutdowns in China. It will also likely take months for the Fed’s higher rates to reduce spending on airline flights, restaurant meals and other services. Many economists worry that this means the Fed will have to clamp down even harder on consumer and business demand, to bring it into balance with the economy’s restricted supply of goods and labor. A news conference that Chair Jerome Powell will hold Wednesday — and whatever signals, if any, he sends about the Fed’s next steps — will draw intense interest. Since the Fed met in June, the government has reported that inflation accelerated to a 9.1% annual rate, the most since 1981. Though that jump reflected a spike in gas prices, which have since declined, inflation worsened even after excluding the volatile energy and food categories. The nation’s June jobs report showed that hiring has remained healthy, with employers adding 372,000 jobs last month. Employers’ continued need for labor has been elevating wages and contributing to inflation as companies pass their higher labor costs on to customers in the […]

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