25-Jul-2023
2 mins read
After pressing pause in June, the US Federal Reserve is set for another key decision. The upcoming meeting, scheduled for July 25-26, may result in the most stringent monetary policy in 22 years, a move driven by an apparent shift in the country’s inflation pattern.
An Overview of Recent Monetary Policies
The Fed, after implementing 10 back-to-back rate hikes within just over a year, decided to hit the brakes last month. This was a strategic move to afford policymakers ample time to evaluate the health of the US economy and consider the impact of banking strains on lending conditions.
However, the interim period since the pause has witnessed encouraging upgrades to economic growth and moderate inflation data. These developments have intensified speculations that the Fed’s rate-setting committee may vote for a quarter percentage-point hike, elevating the federal funds rate to a bracket between 5.25% and 5.5%, a peak not seen since 2001.
Economic Indicators: A Look at Inflation and Growth
Post the Fed’s June pause, inflation, according to its chosen gauge, has decelerated to less than four percent year-on-year. Simultaneously, unemployment figures have hovered near record lows. Further buoying the economic scenario, first-quarter growth received a substantial upward revision, courtesy of robust consumer spending.
These positive indications have enhanced the prospects of a “soft landing” — the Fed’s ability to tame inflation through interest rate hikes without triggering a recession or unemployment spike.
Reflecting this optimism, Goldman Sachs slashed the chances of the US economy slipping into a recession in the subsequent 12 months from 25% to 20%, thus pointing towards a heightened probability of a soft landing. The bank’s chief economist, Jan Hatzius, remains optimistic that taming inflation to acceptable parameters will not necessitate a recession.
The Road Ahead: Fed’s Future Actions
With an expected rate hike on the immediate horizon, the focus is shifting to the Fed’s subsequent moves. Some economists envision another rate escalation as early as the Fed’s next meeting in September, while others suggest the Fed may hold steady rates for an extended period.
Fed Chair Jerome Powell’s press conference following the rate decision is set to be a focal point, with market watchers eager for insights into the central bank’s future strategy. Powell’s commentary could offer much-needed clarity on the indicators the Committee would require to comfortably transition into an extended hold. As we await this crucial policy decision, it’s safe to say that its implications will resonate across the financial landscape, shaping future economic directions.