A Skip and Surprise Provided by the Federal Reserve

Following a series of ten meetings focused on raising interest rates, the Federal Reserve surprised the market by deciding to keep rates unchanged. However, the central bank hinted at the possibility of two more rate hikes before the end of 2023, according to a report from CNBC. This decision, seen as more of a “skip” than a pause, maintains the benchmark borrowing rate at approximately 5.1%. The next rate hike could potentially occur in late July, as reported by the AP. Economic forecasts released by the Federal Reserve indicate that twelve out of the eighteen policymakers project the key rate to finish the year at around 5.6%. In response to this news, the Dow fell over 200 points.

The AP suggests that this “skip” in rate hikes may serve as a strategy to bring together a divided policymaking committee led by Powell. The 18 committee members are split between those who support one or two additional rate hikes and those who advocate for maintaining the current rate for a few more months, observing if inflation continues to moderate. The latter group is concerned that aggressive rate hikes could increase the risk of a severe recession.

A recent government report on inflation provides evidence supporting both sides of the argument. While overall price increases have significantly slowed down, some measures of underlying inflation remain high. Consumer prices rose modestly by 4% in May compared to the same month in the previous year, marking the smallest increase in over two years and significantly lower than April’s 4.9% annual rise. However, the gradual but consistent decline in overall inflation suggests that the previous rate hikes implemented by the Federal Reserve have been somewhat successful. Since March 2022, the central bank has raised the key rate by a substantial 5 percentage points.

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