Fed Raises Interest Rates to 22-Year High, Leaves Door Open for More
While policymakers paused rate hikes last month to assess the impact of previous moves, they also signaled at the time that two more increases would probably be appropriate by the end of the year.
The latest hike was widely anticipated after recent reports showed a resilient economy that has largely withstood higher interest rates so far. But ahead of Wednesday’s decision, investors saw a second increase as less certain, in part because of data on consumer prices showing inflation receded sharply last month.
Assessment Upgraded
The FOMC in its statement Wednesday repeated its description of inflation as “elevated,” and upgraded its description of economic growth to “moderate” from “modest.” It reiterated that the banking sector is “sound and resilient,” while cautioning that credit tightening is expected to weigh on the economy following the failures of three US regional banks earlier this year.
While June’s consumer-price report showed inflation decelerating to 3% from last year’s 9.1% peak, policymakers have expressed concern about so-called “core” inflation, excluding food and energy, which has been slower to come down. They have singled out service-sector inflation in particular as a category they believe remains elevated due to tight labor markets.
Fed officials have also been surprised by the resilience of economic growth. Forecasters expect a quarterly report on gross domestic product due Thursday to show the US economy expanded by an annualized 1.8% in the April to June period.
Some Wall Street economists have pushed back calls for a recession this year in light of the ongoing strength in economic activity alongside receding price pressures.
The FOMC next meets on Sept. 19-20 and subsequently on Oct. 31-Nov. 1. Powell will also have an opportunity to clarify the central bank’s view on the future path of rates at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming, in late August.
–With assistance from Chris Middleton and Liz Capo McCormick.
(Image: Bloomberg)
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