The Federal Reserve, in a highly anticipated move, has approved an interest rate hike that brings benchmark borrowing costs to their highest level in over 22 years. The central bank’s Federal Open Market Committee (FOMC) raised its funds rate by a quarter percentage point, setting a target range of 5.25% to 5.5%. This midpoint of the target range represents the highest level for the benchmark rate since early 2001.
While financial markets had already factored in this hike, there was speculation about whether it would be the last for a while. Fed officials had previously suggested two rate hikes for this year, but there is now a greater likelihood that there won’t be any further moves in 2023.
The post-meeting statement from the FOMC provided limited guidance on future actions. It stated that the Committee will continue to assess additional information and its implications for monetary policy. This data-dependent approach, rather than adhering to a predetermined schedule, aligns with recent public statements from central bank officials.
All voting committee members unanimously approved the rate hike. The only notable change in the statement was an upgrade of economic growth from “modest” to “moderate” at the June meeting, despite expectations of a mild recession ahead. The statement maintained that inflation remains “elevated,” while describing job gains as “robust.”
This rate increase marks the 11th time the FOMC has raised rates as part of its tightening process, which began in March 2022. The June meeting was skipped to assess the impact of previous hikes. Fed Chairman Jerome Powell has expressed concerns about inflation and expects further “restriction” on monetary policy, indicating the possibility of more rate hikes.
The fed funds rate influences various consumer debt forms, such as mortgages, credit cards, and auto and personal loans. The Fed’s current rate hike strategy has not been this assertive since the early 1980s when it faced high interest rates and a struggling economy.
Recent inflation news has been positive, with the consumer price index (CPI) rising at a 3% rate on a 12-month basis in June compared to 9.1% a year ago. Consumer sentiment also indicates optimism about inflation, with a University of Michigan survey predicting a 3.4% pace in the coming year. However, when excluding food and energy, CPI is running at a 4.8% rate. The Cleveland Fed’s CPI tracker suggests a 3.4% annual headline rate and a 4.9% core rate in July. The Fed’s preferred measure, the personal consumption expenditures price index, recorded a 3.8% rise on headline and a 4.6% rise on core in May. While these figures are below the worst levels of the current cycle, they still exceed the Fed’s 2% target.
Despite the rate hikes, economic growth has remained resilient. The Atlanta Fed projects a 2.4% annualized rate for second-quarter GDP growth. Although many economists anticipate a recession within the next 12 months, these predictions have been premature so far. The first-quarter GDP rose to 2% after substantial upward revisions to initial estimates.
Additionally, employment has held up remarkably well, with nonfarm payrolls expanding by nearly 1.7 million in 2023. The June unemployment rate stood at a relatively low 3.6%, the same as a year prior.
The FOMC, along with the rate hike, has indicated its intention to continue reducing its bond holdings on its balance sheet. These holdings peaked at $9 trillion before the Fed initiated its quantitative tightening efforts.
Denial of responsibility! VigourTimes is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
