In a highly-anticipated move, the Federal Reserve (Fed) approved an interest rate increase that sees the benchmark borrowing costs reach their highest level in more than 22 years. The central bank's Federal Open Market Committee (FOMC) adjusted its funds rate up by a quarter percentage point, settling at a target range of 5.25%-5.5%. This signifies the steepest level for the benchmark rate since the early days of 2001.
Market Anticipation And Future Uncertainties
Financial markets had fully priced in the rate hike, but are still seeking indications of whether this adjustment could be the final one before the Fed holds off to observe the impact of previous increases on the economy. Policymakers in June had suggested two rate hikes were likely for the year. However, market players anticipate a higher probability that no more increases will be implemented for the rest of the year.
During a press briefing, Chairman Jerome Powell explained that while inflation has slightly moderated since mid-last year, reaching the Fed's 2% target is still a distant goal. Powell also hinted at the possibility of keeping rates steady at the Fed's next meeting in September, contingent on incoming data.
Assessing Economic Impact
Powell emphasized that the FOMC would evaluate "the totality of the incoming data" and its implications for economic activity and inflation. The FOMC's post-meeting statement was cryptic about the guidelines for future moves, only mentioning that the Committee will continue to assess additional information and its implications for monetary policy.
The approved rate hike saw a unanimous consensus among voting committee members. The FOMC statement also highlighted an upgrade of economic growth to "moderate" from "modest" as of the June meeting, despite looming fears of an impending mild recession.
Historic Tightening Process
This latest adjustment marks the 11th time the FOMC has increased rates since the tightening process began in March 2022. The committee opted to bypass the June meeting to evaluate the impact of the hikes. Powell has consistently expressed concerns over high inflation, hinting at further "restriction" on monetary policy, which suggests more rate hikes.
The fed funds rate is critical as it determines what banks charge each other for overnight lending. The rate directly affects consumer debt forms, such as mortgages, credit cards, and personal loans. The last time the Fed was as aggressive with rate hikes was in the early 1980s when it grappled with remarkably high inflation and a sluggish economy.
Inflation And Economic Resilience
Despite the Fed's stern measures, the consumer price index rose 3% on a 12-month basis in June. Consumers are, however, optimistic about future prices, with the University of Michigan sentiment survey projecting a 3.4% pace in the upcoming year. Even with these figures surpassing the Fed's 2% target, economic growth has shown unexpected resilience amidst the rate hikes.
Economic predictions for a recession within the next year have not materialized as second-quarter GDP growth tracks a 2.4% annualized rate. Employment levels also remain strong with nonfarm payrolls expanding by almost 1.7 million in 2023, and a steady unemployment rate of 3.6% in June.
In addition to the rate hike, the committee confirmed it would proceed with reducing the bond holdings on its balance sheet, which peaked at $9 trillion before the initiation of the Fed's quantitative tightening initiatives.