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The US Federal Reserve started raising interest rates again, and Chair Jerome Powell left the door open to more rate hikes, which he said would depend on reports showing that the US economy is strong.
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After putting a stop to rate hikes in June, officials raised borrowing costs again at a policy meeting on Wednesday. This was the 11th time since March 2022 that borrowing costs were raised. This was done to slow inflation. With the unanimous vote to raise the rate by a quarter points, the target range for the Fed’s benchmark federal funds rate went from 5.25% to 5.50%, which is the highest in 22 years.
Powell pointed to promising signs that the Fed’s rate hikes are working to stop price pressures, but he also said that policymakers have a long way to go to get inflation back to their 2 percent goal.
The head of the US Federal Reserve wouldn’t say when they might raise rates again. He said that there are a lot of economic reports coming out before the Fed’s next meeting in September. These include two reports on jobs, two reports on inflation in consumer prices, and data on hiring costs.
The decision was greeted calmly by the markets. As Powell spoke, equities rose while bond yields and the dollar declined.
The likelihood that the Federal Reserve will increase interest rates by a quarter-point by the end of the year was relatively stable among swaps traders. Prior to the conclusion of the Fed’s tightening cycle, the pricing implies a probability of just barely above 50 percent for a further increase.
Since the beginning of last year, the Fed has been on the most active tightening campaign since the 1980s. They are doing this to try to stop inflation, which hit a 40-year high in 2022. Policymakers put a stop to rate hikes last month so they could see how their previous moves affected the economy. At the same time, they hinted that two more rate hikes would likely be needed by the end of the year.
Many people expected the latest hike after recent reports showed that the economy has mostly been able to handle higher interest rates so far. But before the decision on Wednesday, investors were less sure that there would be a second rise. This was partly because data on consumer prices showed that inflation dropped sharply last month.
The Federal Open Market Committee of the central bank said after the meeting that it would “continue to evaluate additional information.” This was almost the same as what it said in June.
Powell said that when officials decide if and when to raise rates again, they will look for moderate growth, a drop in inflation, and a better mix between supply and demand, especially in the labour market.
According to him, their policies haven’t been enforced strictly enough for long enough to produce the desired results. And we stand ready to tighten further if required; since they want to tighten policy once more until they are satisfied that inflation is dropping gradually to their 2% target. And they think there’s still a long way to go.
In its statement released on Wednesday, the FOMC reaffirmed its classification of inflation as “high” and elevated its depiction of economic growth from “modest” to “moderate.” It reaffirmed that the banking sector is “sound and resilient,” but cautioned that credit tightening is likely to drag on the economy in the wake of the collapse of three US regional banks this year.
Policymakers are concerned about the slow decline in so-called “core” inflation, which excludes food and energy costs, despite the fact that the consumer-price report for June showed inflation slowing to 3% from last year’s 9.1% peak. They feel that, due to labour shortages, service-sector inflation has remained above average.
The Fed has been taken aback by how robust economic growth has been. The GDP report for the second quarter, covering April–June, is expected out on Thursday, and analysts anticipate it will show the US economy grew by 1.8% annually during that time. Wall Street experts aren’t as worried about a recession this year as they were before thanks to the economy’s continued resilience and falling inflation.
The Federal Open Market Committee (FOMC) is scheduled to meet again on October 31 and November 1. At the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming, at the end of August, Powell will have another chance to elaborate on the central bank’s outlook for the future course of rates.
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