As broadly expected, the Federal Reserve Bank moved forward with a 25 bps interest rate increase at its July meeting after a pause in its hiking policy last month, bringing the target range for the Fed’s benchmark Federal Funds rate to 5.25%-5.50%, its highest level in 22 years.
Despite the Fed’s 16-month campaign to curb inflation, the US economy is proving resilient. While inflation has consistently been cooling down following a 9.1% peak in June 2022, it is decreasing slower than expected. Prices for goods and services decelerated to a 3.0% annual rate in June, according to the latest Consumer Price Index (CPI) report released by the Bureau of Labor and Statistics. However, the so-called core CPI, which excludes the more volatile prices of food and energy, remains uncomfortably elevated at 4.8%. In addition, the US job market, an ongoing concern for the Fed, remains strong with low levels of unemployment.
The housing market is also showing quick signs of recovery, with the latest readings for the S&P Case-Shiller Index indicating that US home prices increased for the fourth consecutive month in May by 0.7%. However, year-over-year appreciation was down 1.7% nationwide. The FHFA House Price Index shows an increase in both monthly, at 0.7% and annually, at 2.8%.
“What our eyes are telling us is policy has not been restrictive enough for long enough to have its full desired effects,” said Fed Chair Jerome Powell. “We intend again to keep policy restrictive until we’re confident that inflation is coming down sustainably to our 2% target, and we’re prepared to tighten further if that is appropriate. And we think the process still probably has a long way to go.”
Will There Be Another Rate Increase?
The Federal Reserve Bank will meet again in September, and policymakers are keeping the door open to further increases. They will be relying on future reports to make their decision, including two jobs’ reports, two reports on consumer-price inflation, and data on employment costs. “All of that information is going to inform our decision as we go into that meeting,” said Mr. Powell. “It is certainly possible that we would raise [rates] again at the September meeting, if the data warranted. And I would also say it’s possible that we would choose to hold steady at that meeting.”
Economists remain cautious and expect one or two further rate hikes before the end of the year. “My base case is that we will be able to achieve inflation moving back down to our target without a really significant downturn that results in high levels of job losses,” Powell said. “But it’s a long way to be sure and we have a lot left…. Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions.”
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