The Fed continues to do the job

The Federal Reserve raised interest rates by 25 bps to the highest level since 2001. The unanimous decision by the FOMC raised the target range of the federal funds rate to 5.50%. This was the 11th increase since March 2022 when the rate was near zero.

“For the future, we will continue to take a data-dependent approach to determine the extent of any further strengthening of policy that may be appropriate,” Powell said during the usual press conference following the meeting. The message is quite similar to his previous statement in June. Powell stated that the data could justify either keeping rates steady or raising them again at the next Fed meeting in September. The committee’s unanimous decision and the rhetoric of the message leave little room for doubts. Barring an unlikely turnaround in inflation data, the FOMC will raise its rates in September.

Since the beginning of last year, the Fed has been engaged in the most aggressive tightening campaign since the 1980s to curb inflation, which reached a 40-year peak in 2022. While it had paused rate hikes last month to assess the impact of previous moves, the Fed also signalled that two further increases would likely be appropriate by year-end.

While the June consumer price report showed a deceleration in inflation to 3% from last year’s peak of 9.1%, the FOMC expressed concern about core inflation, which excludes food and energy and has been slower to come down. They notably identified inflation in the services sector as a high category due to tight labour markets.

Fed officials were also surprised by the resilience of economic growth. Forecasters expect GDP growth of 1.8% on an annualized basis from April to June. With the spectre of a recession receding, this paves the way for combating inflation and continuing rate hikes.

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