ALBAWABA – The United States (US) Federal Reserve (Fed) raised the benchmark US interest rate to the highest level since 2001 on Wednesday, with potentially more hikes to come this year, news agencies reported.
The Fed raised the key US interest rate by 0.25 percent, according to Reuters.
This hike, after a brief pause in June, brings the US interest rate to a 5.25-5.5 percent range. It is the Fed’s 11th increase since the monetary policy tightening cycle began in March 2022.
US interest rates have not been this high seen right before the 2007 housing market crash and the consequent financial crisis. Nor have they exceeded this range in over two decades.
When asked when the next hike is to be expected, Fed Chair Jerome Powell refused to disclose any specifics to reporters, during the press conference. However, he did highlight that there are several economic reports coming out before the Fed board next meets again in September.
Two jobs reports are due before then, in addition to two consumer-price inflation reports and data on employment costs, Bloomberg confirmed.
These reports will help the Fed get a better and deeper reading on the state of the economy and the results of the central bank’s tightening policy measures.
Will there be more US interest rate hikes?
For now, key inflation gauges are still increasing at more than double the Fed's target of 2 percent.
Though inflation has reportedly been easing, and so is the economy, supposedly, it has not reflected much on the labor market, as unemployment remains at a low 3.6 percent, as reported by Reuters.
A hot labor market is a strong indicator of inflation and a speeding economy, along with wage growth rates. Even as employment growth decelerates in the US, wage growth rates are still high in June, official data reported.
Economic growth has remained above the Fed's estimated 1.8 percent trend rate. But economists polled by Reuters expect data on Thursday to show gross domestic product (GDP) expanded by exactly that much.
"Policy has not been restrictive enough for long enough to have its full desired effects," Powell told reporters after the decision to hike the US interest rate was announced.
"So we intend, again, to keep policy restrictive until we're confident that inflation is coming down sustainably toward our two percent target – and we're prepared to further tighten if that is appropriate," he added.
In a statement, the US central bank said it will "continue to assess additional information and its implications for monetary policy," looking at a range of data points "in determining the extent of additional policy firming."
"We're going to be going meeting by meeting," Powell said.
At the previous meeting of the Federal Open Market Committee (FOMC) in June, the median forecast was for two additional rate hikes this year.
Reuters and Bloomberg’s analysts and economists, earlier in July, forecasted there will have to be more US interest rate hikes if the Fed intended to bring inflation down to target.
Forecasts on further US interest rate hikes
Back in June, many economists and analysts expected another pause on US interest rate hikes in July, as data indicating a slowing rate of inflation in April and May. Not long after, investors and traders started shifting their forecasts.
By July, there was near consensus on the Fed raising US interest rates by a quarter point this month.
According to AFP, investors are less confident today about the chances of another increase at the next Fed meeting in September.
Futures traders currently assign a probability of just over 20 percent that the FOMC will raise US interest rates again in September, according to CME Group.
Nonetheless, the Fed’s goal is not yet attained.
"Inflation has moderated somewhat since the middle of last year," Powell said on Wednesday, adding that the "process of getting inflation back down to two percent has a long way to go."
"The Fed will stand its ground and hold rates high well into 2024, barring a more pronounced slowdown in the economy and rise in unemployment," KPMG US's chief economist Diane Swonk wrote in a note published shortly after the Fed decision on Wednesday.
"The goal is to defeat, not just cool, inflation," she said, adding that KPMG expects another US interest rate hike in November. The gap gives the Fed some time to “assess how rapidly the economy is actually cooling and the risk of noise due to strikes."
After all, no one wants the economy to start shrinking. Only to slow down ever so slightly, to keep the value of the US dollar and consumer prices in check.
Soft landing after 11 US interest rate hikes
Recent positive economic news has increased the chances of a so-called "soft landing".
A soft landing is a case in which the Fed actually succeeds in bringing down inflation by raising interest rates while avoiding a recession and a dramatic surge in joblessness.
On Wednesday, Powell reiterated that a soft landing is still very possible.
"It has been my view consistently that we do have a shot," he said, at a soft landing. "That's been my view, that's still my view."
Powell has also told reporters that his staff's expectations for a recession to kick in later this year has all but diminished.
"The staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession," he said.
"This is quite the pivot in a month," Oxford Economics' chief US economist Ryan Sweet wrote in a note to clients regarding the Fed staff's updated outlook.
