27-Jul-2023
2 mins read
In its recent policy meeting, the US Federal Reserve resumed its cycle of rate hikes, setting a 22-year high and leaving the door open for future increases, depending on upcoming economic data signals.
The Fed’s Benchmark Rate Increase
The Federal Reserve’s borrowing costs were boosted again on Wednesday, marking the 11th rate hike since March 2022. This comes after a brief pause in the rate hikes in June. The unanimous decision raised the Federal Funds rate to a range of 5.25 per cent to 5.5 per cent. This level hasn’t been seen in over two decades, reflecting the Fed’s ongoing effort to curb inflation.
Chair Jerome Powell pointed out that the rate hikes seem to be working as intended, successfully reducing price pressures. However, he made it clear that there’s still a considerable journey ahead to reach the goal of a 2 per cent inflation rate.
Will There Be More Hikes?
The Federal Reserve Chief refrained from making any concrete statements about future hikes, hinting that the Fed would consider a series of economic reports due before the next meeting in September. These include job reports, consumer price inflation reports, and employment cost data.
The decision to increase rates was absorbed well by the markets. Stocks advanced while treasury yields and the dollar fell. Swaps traders also expected another quarter-point rate increase by year’s end.
Context of the Rate Hikes
The Federal Reserve has been carrying out its most aggressive tightening campaign to control inflation since the 1980s last year. Inflation rates in 2022 reached a 40-year high. Policymakers paused the rate hikes last month to assess their impact but signalled that two more increases might be appropriate by year’s end.
Inflation and Economic Growth
The Federal Open Market Committee described inflation as “elevated” while upgrading the description of economic growth to “moderate” from “modest.” It expressed concerns about “core” inflation, which excludes food and energy, and has decreased slowly. According to policymakers, this “core” inflation remains high, primarily due to tight labour markets.
Resilient Economy, Despite Tightening Policies
Despite the tightening monetary policy, the US economy has shown resilience. Recent forecasts anticipate a quarterly report to show the US economy expanding by an annualised 1.8% from April to June.