The Federal Reserve made a highly anticipated move on Wednesday, deciding to increase its benchmark borrowing costs, leading to the highest interest rates seen in more than 22 years. As expected, the Federal Open Market Committee raised its funds rate by a quarter percentage point, setting a target range of 5.25%-5.5%. Notably, the midpoint of this range is the highest rate for the benchmark since early 2001.
Market analysts had been closely monitoring the possibility that this hike could be the last before the Federal Reserve pauses to assess the impact of previous rate increases on the economy. Though the committee indicated the likelihood of two more rate rises in the year, there are suggestions that there might not be further moves this year.
During a news conference, Chairman Jerome Powell stated that inflation had somewhat moderated since the previous year, but achieving the Fed’s 2% target would still require more progress. Powell left open the possibility of either raising rates again in September or maintaining a steady stance, emphasizing that each decision would be made based on careful assessments of incoming data and economic conditions.
Markets initially responded positively to the meeting’s outcome, with the Dow Jones Industrial Average continuing its trend of higher closings, while the S&P 500 and Nasdaq Composite remained relatively unchanged. Treasury yields experienced a decrease.
Chief economist at RSM, Joe Brusuelas, emphasized that it is time for the Fed to allow the economy time to adapt to the impact of past rate hikes, suggesting that the conditions may be favorable for the Fed to conclude its rate hike campaign.
The committee’s post-meeting statement maintained a data-dependent approach to future moves, and it received unanimous approval from the voting committee members. One notable change in the statement was an upgrade of economic growth from “modest” to “moderate” despite expectations of a mild recession ahead. Inflation was described as “elevated,” and job gains were seen as “robust.”
This latest increase marks the 11th rate hike in a tightening process that commenced in March 2022, with the Fed opting to skip the June meeting to assess the impact of previous hikes.
Inflation has been a significant concern, and while recent data shows some improvement, it remains above the Fed’s 2% target. Economic growth has been resilient despite the rate hikes, with second-quarter GDP tracking at a 2.4% annualized rate and employment holding up well.
Alongside the rate hike, the committee also revealed its intention to continue reducing the bond holdings on its balance sheet, which has seen a significant decline since its peak at $9 trillion before the start of quantitative tightening efforts.
Source: CNBC
