Daily Management Review

US Fed's Powell Leaves Room For Another Rate Increase In September As The Fed Raises Rates Aa Expected


US Fed's Powell Leaves Room For Another Rate Increase In September As The Fed Raises Rates Aa Expected
The United States Federal Reserve increased interest rates on Wednesday by a quarter of a percentage point. Fed Chair Jerome Powell stated that for inflation to "credibly" return to the U.S. central bank's 2% target, the economy must still slow down and the labour market must deteriorate.
The increase, the Fed's 11th in the past 12 sessions, raised the benchmark overnight interest rate to a range of 5.25%-5.50%, which had not been continuously exceeded for about 22 years and had last been seen immediately before the 2007 housing market meltdown.
"The (Federal Open Market) Committee will continue to assess additional information and its implications for monetary policy," the Fed said in language that was little changed from its June 14 statement and which left the central bank's policy options open as it searches for a stopping point to the current tightening cycle.
The September meeting, which is eight weeks away, is currently thought to be "live" for another rate increase, though a continued slowdown in inflation and poor economic data may possibly cause officials to take a break. Powell offered no commitments in either direction.
Following the Fed's most recent policy decision, Powell said in a press conference that the central bank was closely examining "the totality" of incoming data and specifically looking for indications that the economy was headed for a period of "below-trend" growth, which Powell believes is necessary for inflation to decline.
Important price indicators are still rising at a rate that is higher than double the Fed's goal. The labour market, where the unemployment rate is still at a low 3.6%, hasn't seen much of a hit as inflation has been slowing down. The second quarter's gross domestic product is expected to have increased at just that percent, according to experts surveyed by Reuters. Economic growth has continued to exceed the Fed's estimated trend rate of 1.8%.
Powell cited the fact that inflation has decreased from its peak without significantly harming the economy as a positive development.
But he added that the Fed is entering a challenging phase in its battle against inflation, balancing the necessity for additional rate hikes against the risks of going too far. He added that it will probably take some economic losses to complete the work on inflation.
"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."
The Federal Reserve said following its meeting last month that it will monitor incoming data and analyse the effects of rate hikes on the economy "in determining the extent of additional policy firming that may be appropriate" to accomplish its inflation target.
Although inflation indicators have been worse than anticipated since the Fed's meeting on June 13–14, policymakers have been hesitant to abandon their hawkish stance until there has been more success in reducing price pressures. 12 out of 18 policymakers predicted that at least one more rate hike would be required by the end of this year for financial conditions to remain restrictive enough to ensure that inflation continued to drop in their most recent predictions, which were released at the conclusion of the June meeting.
Powell stated that choices would continue to be taken meeting by meeting and that in the current climate, policymakers can only offer limited information about what will come next for monetary policy.
"It is certainly possible that we would raise the (federal) funds rate 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" if that was the right policy call, Powell said.
However, he issued a warning against anticipating any rate decrease in the foreseeable future. Powell stated, "We won't be comfortable decreasing rates this year. We'll be comfortable cutting rates when we're comfortable doing so.
Following the publication of the Fed policy statement, U.S. Treasury yields decreased in tumultuous trading, while U.S. stocks closed essentially unchanged. The prospects of a rate increase in September were low, and futures markets indicated little movement in betting on the direction of Fed rate rises over the course of the year.
"The forward guidance remains unchanged as the committee leaves the door open to further rate hikes if inflation does not continue to trend lower," said Kathy Bostjancic, chief economist at Nationwide. "Our view is the Fed is likely done with rate hikes for this cycle since continued easing of inflation will passively lead to tighter policy as the Fed holds the nominal fed funds rate steady into 2024."
The Fed statement acknowledged the economy's ongoing success.
The latest "Beige Book" report on economic activity from the central bank noted the ongoing job growth, robust auto sales, and massive attendance figures for events like the Taylor Swift concerts and the new "Barbie" movie.
The Fed noted that job growth is still "robust," and that economic expansion is now progressing at a "moderate" rate rather than the "modest" rate that had been anticipated at the June meeting.
Powell expressed continued optimism that the economy can experience a "soft landing," or a situation in which inflation declines, unemployment stays low, and a recession is averted.
However, his remarks about the necessity of slower development raise the possibility of a bias in favour of higher rates to increase pressure on demand. Outside analysts continue to believe that a recession may be necessary to end the fight against inflation, despite Powell's claim that Fed staff have softened a forecast of one in the near future.
"We would still think that you need a recession or some deeper slowing at some point in order to get inflation back to 2%," said Veronica Clark, an economist at Citi. "So if we're not having a recession in the next year, inflation is not back to 2% either ... You are still dealing with high inflation and you do still need to slow things more."