Federal Reserve Raises Interest Rates by 0.25 Percentage Point, Considers Further Increase Despite Inflation Easing

Federal Reserve Raises Interest Rate Despite Easing Inflation, Hints at Possible Further Hike in the Future

Despite a recent slowdown in inflation, the Federal Reserve decided to raise its key interest rate by a quarter point, bringing it to a range of 5.25% to 5.5%. This marks the highest level in 22 years. The move comes as the economy remains strong, and the central bank indicated that another rate hike is being considered in the coming months.

The Fed’s statement emphasized that future rate increases will depend on inflation trends, as well as other economic and financial developments. Analysts predict that another rate increase is likely to occur in September or November, given the Fed’s language in its recent statement.

The central bank also upgraded its description of economic activity, stating that it has been expanding at a moderate pace, and job gains have been robust with low unemployment rates. This positive outlook may indicate that the economy could withstand further rate hikes, potentially pushing inflation higher again.

For consumers and businesses, this means higher borrowing costs, including credit cards, adjustable-rate mortgages, auto loans, and other loans. However, there is some relief for savers, especially seniors, as banks’ savings yields have improved after years of low returns.

After a series of rate increases over the past 14 months, the Fed paused its aggressive hiking campaign in June to assess the impact of its strategy. Despite easing inflation, the Fed still considers two more rate increases to contain the pandemic-related inflation surge. Recent data showed a slowdown in overall inflation and core readings, which may indicate a turning point for inflation.

Goldman Sachs believes that the latest rate hike will likely be the last, as core inflation is expected to decrease further by the November meeting. Market predictions also suggest that the Fed will hold rates steady before considering rate cuts next year.

Current State of the U.S. Economy and Potential for Another Fed Rate Hike

Despite the recent resilience of the economy and the stock market, Barclays believes that the Federal Reserve will opt for another rate increase.

The expected government report indicates that the economy grew by a solid 1.8% in the second quarter, surpassing earlier projections by many forecasters.

Employers added 209,000 jobs last month, and average wages grew by 4.4% annually, indicating strong but slightly slowed growth. Initial jobless claims have also decreased after a temporary rise in June.

Consumer spending, a key driver of the economy, remains robust despite higher borrowing costs and prices. Retail sales, excluding volatile categories, have increased significantly.

Financial conditions have been favorable, with the S&P 500 stock index showing steady growth since March, positively impacting consumer sentiment and spending.

Given the positive economic backdrop, the Fed may be skeptical about inflation maintaining a downward trajectory towards its 2% target without another rate hike, according to Barclays.

While inflation has eased since the Fed’s rate hike campaign began, experts have differing opinions on the impact of the rate hikes. Some attribute the progress to the unwinding of pandemic-related supply chain disruptions and changes in consumer spending, while others believe the central bank played a supportive role in influencing inflation expectations and curbing a heated job market.

Upcoming Federal Reserve Interest Rate Decisions and Their Impact

The Federal Reserve’s meeting schedule includes sessions in July, September, October/November, and December.

The recent Fed rate increases have influenced credit card rates, as they are tied to the prime rate, which closely follows the Fed funds rate. Over time, credit card rates have increased significantly, with the average new credit card now carrying an interest rate of 24.2%. This rise has led to higher monthly interest charges for consumers, affecting their credit card balances.

Despite the impact of inflation and higher interest rates on borrowing costs, the U.S. gained 209,000 jobs in June, and the unemployment rate declined to 3.6%. However, this job growth was the slowest since December 2020.

Stock markets have been performing well amid hopes that inflation is easing enough for the next rate hike to be the last in the year, preventing a recession due to a strong labor market. While the S&P 500 index and the Dow have seen positive streaks, concerns linger as higher rates can make borrowing and business investment costlier, potentially leading to reduced consumer spending and corporate profits. Economists warn that a ripple effect may still occur later in the year, even though the risk of a recession has diminished.

Overall, economic conditions remain a point of interest, and the Fed’s monetary policy decisions will continue to shape the market landscape.

Understanding Recessions and the Impact of Rate Hikes

A recession is characterized by a significant economic decline that extends across various sectors and lasts for more than a few months. It is identified by indicators like the jobless rate, consumer spending, retail sales, and industrial production. The most recent recessions occurred during the 2008/2009 housing crisis and the 2020 COVID-19 pandemic, causing massive layoffs and economic challenges.

In 2023, the possibility of another recession arises due to the Federal Reserve’s string of rate hikes aimed at controlling the rapid post-pandemic economic growth. Despite inflation rates decreasing since their peak in June 2022, the Fed projected further rate increases in 2023 to address inflation concerns.

While rate hikes may bring higher costs for borrowers, they are beneficial for savers who will see improved yields on their savings deposits. For the stock market, the Fed’s decisions have led to mixed reactions and uncertainties.

The Fed’s recent rate increases have impacted consumers’ finances, with extra interest charges amounting to billions of dollars. However, financial analysts predict that inflation will likely decrease to more normal levels by the end of 2023 and into 2024, though it still remains above the Fed’s 2% target for now.

The Impact of Raising Interest Rates on Inflation

Raising interest rates is a measure taken by the Federal Reserve to curb inflation by making borrowing more expensive for consumers and businesses. This approach aims to slow down spending and mitigate spikes in the costs of goods and services.

Frequency of Fed Rate Increases

Since March 2022, the Federal Reserve has implemented 10 consecutive rate hikes, totaling 5 percentage points, making it the most significant series of rate increases in 40 years. However, in June, the Fed broke that streak and left the key rate unchanged.

Can the U.S. Avoid a Recession?

Economists have been hopeful for a “soft landing,” wherein inflation is controlled without significant jumps in joblessness or economic contraction. The fear of a potential recession stemmed from the 10 consecutive rate hikes, which could have threatened the economy. Nevertheless, factors like low unemployment, consistent consumer spending, and gradually falling inflation offer hope for a softer outcome.

Current State of the U.S. Economy

As of now, the U.S. is not in a recession, but some economists warn that continuous rate hikes by the Fed may eventually lead to a downturn. Despite stubborn inflation, Americans have benefited from substantial savings accumulated during the pandemic. However, the savings cushion has started to wane, with only about $1.5 trillion of the pandemic-related surplus remaining.

Current Fed Interest Rate and Inflation Rate

Following the extensive rate increases, the Federal Reserve paused its actions in June, maintaining the benchmark rate in the range of 5% to 5.25%. Meanwhile, the consumer price index reported a 3% rise in overall consumer prices in June compared to the previous year, down from the 4% increase recorded the month before.

Inflation Cools for 12th Consecutive Month Despite Mixed Price Trends

In June, inflation continued its deceleration for the 12th consecutive month, with grocery prices stabilizing and gas prices increasing once more, while rent costs remained persistently high.

The price landscape has been quite diverse, with some items becoming more affordable, such as used cars, as supply chain disruptions from the pandemic gradually resolve. However, other services like haircuts and car repairs have seen continued price increases as employers offer higher wages to retain workers in the face of ongoing labor shortages.

Federal Reserve’s Upcoming Decision

Despite the slowdown in core price increases, overall inflation remains above the Federal Reserve’s 2% target. As a result, it is likely that the central bank will implement another interest rate increase this month, following the pause in rate hikes observed in June to assess the impact of previous increases.

Nevertheless, the moderation in core price inflation may prompt the Fed to maintain interest rates at their current levels for the remainder of the year.