The Federal Reserve increased its benchmark interest rates by a quarter percentage point on Tuesday, bringing them to their highest level in over 22 years. It also left the door wide open for further increases to occur this year.
Federal Open Market Committee unanimously supported a new range for the federal funds rate of 5,25 to 5,5 percent, and resumed its most aggressive campaign to tighten monetary policy in decades.
The increase on Wednesday followed a short reprieve during the previous FOMC meeting in June when the FOMC kept the benchmark rate unchanged. Fed Chair Jay Powell said at the time that the central bank was going to take a gradual approach to raising rates to make up for the months of increases in the past and the fallout from a regional banking crises this spring.
The committee stated that the inflation was “high”, recent job gains were “robust”, and economic activity is expanding at a “moderate pace”.
The committee stated that it would continue to “assess additional information” and its implications on monetary policy.
Powell declined to comment in a press briefing following the announcement on whether or not the Fed will increase interest rates at its next September meeting.
He said that it was possible to raise money again at the meeting in September if data indicated this. “I would also say that it is possible that we will choose to remain the same at this meeting. We will be doing careful evaluations. . . Meeting by meeting.”
The Fed’s announcement had little impact on the markets, as both US stocks and Treasury yields fell slightly that day. The interest rate futures market was betting that there would be a 50-50 chance for another interest rate increase this year.
Powell stated that “we have covered a great deal of ground, and we haven’t felt the full effect of our tightening yet.” He added that the committee will “take an data-dependent approach” in determining whether or not more rate increases are necessary.
Powell said that it was a “good thing” the Fed’s rate increases had “achieved disinflation”. . . “Without any significant negative impact on labour market”. He warned that “stronger growth may lead to higher inflation over time”, which would require more tightening by the central bank.
The [monetary] policies have not been restrictive for long enough in order to achieve the full effect.
Powell expressed hope that the Fed could pull off a’soft landing’, noting that the central bank’s economists had changed their prediction of the recession for the largest economy in the world.
He said that the staff had now predicted a noticeable growth slowdown later in this year. “But due to the recent resilience of the economic situation, they no longer predict a recession.”
The Fed has raised its benchmark interest rate from zero to over five percent since March 2022. This is closer to the level of borrowing costs that it considers “sufficiently restrictive” for bringing inflation to its 2 percent target.
Powell said last month that the Fed is “not far from the destination”. Powell last month said the Fed was “not so far away from the destination”.
The US economy defied the expectations for a more severe slowdown in this year. This is a problem for the central banks. The labour market is still strong and has not cooled down, which helps to boost consumer spending. The headline inflation rate has dropped as food and energy prices have decreased, but “core” measures which remove these volatile costs are still well above the Fed target.
Last month, officials revised their forecasts of core inflation as measured by the Personal Consumption Expenditures Price Index. This was due to concerns that certain price increases — particularly those in the services sector — remained elevated. They also increased their forecasts for the peak level of the Fed Funds rate this year.
Most officials in June predicted that the benchmark rate would top out between 5.5% and 5.75%, implying a further quarter-point rise after a move made in July.
Market participants and economists, however, are skeptical that the Fed will continue to raise rates this year.
Bob Michele is the chief investment officer of JPMorgan Asset Management. He said, “We believe that the Fed has finished raising rates.” We see enough signs that inflation is easing. “By the time they get together in September, this is likely to show up in both the inflation and growth.”
The Fed will meet again in September after the July meeting, and this time it will have two full months of data, including jobs, inflation, and consumer spending.
Christopher Waller is a FOMC governor who has been one of its most hawkish members. He recently stated that the FOMC meeting in September would be a “live meeting”. This means the Fed may raise rates at this time.
Many economists, however, believe that the central bank will have a very high bar to meet in September. Most economists expect that if data show the need for a second rate hike, it will be implemented during the November meeting.
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