After a pause, US Fed likely to hike interest rates to 22-year high
The US Federal Reserve is expected to implement another interest rate hike this week, despite recent indications of slowing inflation. Many experts anticipate a 25 basis points hike, raising the federal funds rate to its highest level since 2001.
After a pause in June, the US Federal Reserve is widely expected to implement another interest rate hike on Wednesday, marking its most restrictive monetary stance in 22 years, despite recent indications of slowing inflation. Following 10 consecutive hikes in just over a year, the Fed decided to halt its aggressive campaign of monetary tightening last month to allow policymakers more time to assess the US economy's health and the impact of recent banking stresses on lending conditions.
In the weeks since the pause, positive upgrades to economic growth and moderate inflation data have strengthened the likelihood that the Fed's rate-setting committee will vote for a quarter percentage-point hike on July 25-26. This move would raise the federal funds rate to a range between 5.25% and 5.5%, its highest level since 2001.
Many experts, including Joseph Gagnon from the Peterson Institute for International Economics (PIIE) and Michael Gapen, Bank of America's chief US economist, anticipate the 25 basis points hike at the upcoming meeting.
Futures traders are now highly confident, with a probability of over 99%, that the Fed will raise its base rate by 25 basis points at the next meeting. While a rate hike in July is widely expected, uncertainties remain regarding how much further the Fed will need to act this year to bring inflation back down to its long-term target of two percent.
Since the Fed's decision to pause in June, inflation, as measured by its preferred indicator, has slowed to less than four percent year-on-year, while unemployment has remained close to record lows. Economic growth has also been revised upward significantly for the first quarter, driven by stronger-than-expected consumer spending.
These positive economic developments have raised the chances of a "soft landing," in which the Fed successfully curbs inflation through interest rate hikes without causing a recession or surge in unemployment.
Goldman Sachs has lowered the probability of the US economy entering a recession in the next 12 months to 20 percent from 25 percent, indicating an increased likelihood of a soft landing scenario. The bank's chief economist, Jan Hatzius, expressed confidence that bringing inflation down to acceptable levels would not require a recession.
Looking ahead, analysts are now focused on the Fed's actions after the expected rate hike on Wednesday. Some economists predict another rate hike as soon as the Fed's next meeting in September, while others believe the Fed may maintain steady rates for a while longer.
The press conference by Fed Chair Jerome Powell following the rate decision will be closely monitored for any hints on the central bank's future moves. Many are curious about what markers the Committee would require to feel comfortable moving into an extended hold, and Powell's remarks may provide clarity on the matter.
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