Fed expected to raise interest rates, escalate fight against inflation

(NEW YORK) — Wall Street will watch closely on Wednesday as the Federal Reserve is expected to escalate its fight against inflation with a dramatic interest rate hike.

The move would come a little more than a week after a higher-than-expected inflation report revealed that prices rose slightly in August, worsening the cost woes for U.S. households and sending the S&P 500 tumbling for its worst day of 2022.

The Fed has instituted a series of aggressive interest rate hikes in recent months as it tries to slash price increases by slowing the economy and choking off demand. But the approach risks tipping the U.S. into an economic downturn and putting millions out of work.

Speaking at a conference held by the conservative-leaning Cato Institute, Fed Chair Jerome Powell said earlier this month that the central bank must act “forthrightly, strongly” to dial back inflation.

The combination of those comments and the inflation data last week has led many economists to expect another 0.75% interest rate hike on Wednesday. Some economists have predicted that the Fed will raise rates by 1%, which it has not done in four decades.

At each of its last two meetings, the central bank has increased its benchmark interest rate by 0.75% — jumbo-sized hikes last matched in 1994.

The rate hikes have yielded mixed results, however. On an annual basis, consumer prices have moderated slightly but remain highly elevated.

The consumer price index rose 8.3% over the past year as of August, a slight slowdown from 8.5% in July, according to the Bureau of Labor Statistics.

Some prices have already fallen significantly, though. Gas prices dropped 10.6% in August, the bureau said.

Meanwhile, rate increases appear to have slowed key sectors of the economy, sending mortgage rates higher and slowing the construction of new homes, for instance.

Still, other indicators suggest the U.S. economy continues to hum.

U.S. hiring fell from its breakneck pace but remained robust in August, with the economy adding 315,000 jobs and the unemployment rate rising to 3.7% as more people sought work, according to data released by the Bureau of Labor Statistics in early September.

At closing Tuesday, each of the major stock indexes fell roughly 1% ahead of an anticipated rate hike. The Dow Jones Industrial Average tumbled nearly 300 points.