The US Federal Reserve (Fed) has increased its benchmark interest rate by a quarter of a percentage point to 5.25-5.5%, signaling the possibility of further rate hikes later this year. The Federal Open Market Committee (FOMC) unanimously supported the move, resuming its aggressive monetary tightening campaign.
The decision was driven by several factors, including elevated inflation, robust job gains, and moderate economic expansion. The FOMC remains highly attentive to inflation risks and will assess additional information to determine the implications for monetary policy.
Federal Reserve chair Jay Powell refrained from confirming whether rates would increase again in September. He stated that that future decisions would be data-dependent. Despite the rate hike, markets showed minimal reaction, with US stocks and Treasury yields slightly lower on the day.
Powell acknowledged that the rate increases had managed to achieve disinflation without significantly impacting the labor market. However, he cautioned that stronger growth could lead to higher inflation in the long term, necessitating further tightening.
Fed hopeful rate hikes eases inflation
The Fed aims for a “soft landing,” and economists have revised their forecasts. They are predicting a slowdown in growth later this year without a recession. With the benchmark rate now above 5%, the Fed believes it is moving closer to achieving its goal of bringing inflation down to 2%.
While inflation fell to 3% in June, concerns remain as certain price increases, especially in the services sector, remain elevated. Despite the positive economic data, doubts persist among market participants and economists about the Fed’s commitment to further rate hikes this year.
The Fed’s next meeting in September will be crucial, with data on jobs, inflation, and consumer spending informing their decision. Some economists believe that the bar for additional tightening in September is high, and if needed, a rate hike may occur at the November meeting as well.