Fed sticks with plan to boost interest rates to fight inflation, allow economy to recover

The Federal Reserve will act again this week to stem inflation and put itself a step closer to ending its cycle of raising interest rates.

That offers cold comfort to borrowers, yet it may steel economic optimists.

The central bank’s interest-rate setting committee meets Tuesday and Wednesday, culminating with the highly likely announcement that it will raise its target borrowing rate by another one-half of 1%. That would bring the Fed’s benchmark interest rate to 1.5%, a sharp increase from 0% in March.

This third one-half of 1% hike in three months won’t move the stock markets much. How bankers convince investors they remain steadfast in their fight against inflation, while addressing increasing worries of a recession will be what may fuel stock and bond prices, possibly reversing the year-to-date stocks slide.

The Fed always is straddling its dual mandate of full employment and stable prices. The strong job growth has given the agency cover to go after generational-high inflation.

Increasingly, the central bank is navigating a thin tightrope — tamping down inflation through higher interest rates while talking up the economy’s ability to withstand higher borrowing costs and the Fed reducing its enormous portfolio of U.S. government bonds and mortgage-backed bonds.

“Our economy needs to stand on its own,” Federal Reserve Bank of Atlanta President Raphael Bostic told me last month. “We’ve done all the things that we did to make sure that the economy didn’t collapse” during the early weeks of the coronavirus pandemic in spring 2020.

Now the Fed is faced with a different fight: the courage to battle inflation while offering a convincing case the economy can withstand that fight without retreating. So far, key economic data is on its side even if stock markets remain skeptical.

The corporate earnings data is less clear. Retailer Target last week cut its profit prediction for the second time in three weeks, revealing it has to slash prices to move products. Snapchat, the social media platform, warned in late May the economy “deteriorated further and faster than anticipated.” In early June, Microsoft sliced its forecasted earnings. Each company pointed to different culprits for softer-profit warnings: too much inventory, a stronger dollar and a slowing economy.

Long-term investors know the Fed must continue tackling inflation, while not tripping up the economy.