Will central bank pause again or hike to combat stubborn inflation?
The Federal Reserve has raised interest rates yet again, as widely expected, marking the 11th hike out of the past 12 meetings.
Despite a pause last time out, the central bank today raised the benchmark overnight rate 0.25% to the 5.25%-5.50% range — its highest level in 22 years. The move represents another attempt to rein in stubborn inflation, which has cooled to just under 3% but remains above the central bank’s 2% target.
The consensus is that the Fed is nearing the end of its hike cycle, but it clearly felt the need to act further with the economy remaining strong amid recession fears, consumer spending more than 4% in Q1 and the jobs market robust despite weakening slightly in June.
A hawkish Fed was predicted by markets this morning with stocks lower. The S&P 500 dropped from the highest level since April 2022, the tech-heavy Nasdaq 100 underperformed and Dow Jones Industrial Average wavered.
In a statement, the Federal Reserve said: “Recent indicators suggest that economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.
“The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”
It added: “In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
Advisor reaction to Fed announcement to follow.
