On 26 July, the U.S. Federal Reserve’s Open Market Committee voted unanimously to add another quarter point to its interest rates, raising them to 5.25 percent on deposits and 5.5 percent on loans, their highest since 2001.
It was the 11th increase in the 12 Fed meetings since March 2022, when the rates were below 1 percent.
As a result, other interest rates across the economy—from home loans and credit cards to corporate bonds—are likely to increase as well.
It remains too soon to say whether the central bank is done raising interest rates, Fed chair Jerome Powell said in a post-meeting press briefing.
The Fed could continue to raise interest rates in the months ahead, depending on new economic data and “with a particular focus on making progress on inflation,” Powell added.
At its June meeting, the committee paused its campaign of rate increases but projected two more hikes this year among its three scheduled meetings before 2024. The group meets again next month.
Powell’s mission at the July session was to keep markets guessing about another increase so the likelihood would be “priced as a coin flip” in the futures markets, which “maximizes flexibility for the Fed to react to incoming data,” Daleep Singh, PGIM Fixed Income’s chief economist, told The Wall Street Journal.
Although inflation is now down two-thirds from its 9.1-percent peak in June 2022, the labor market remains strong. That could pressure wages upward, which could force employers to raise prices to cover the extra cost.
Also, the core price index, excluding energy and food costs, increased in June 4.8 percent, year on year.
“Inflation has repeatedly proven stronger than we and other forecasters have expected,” Powell said. “At some point, that may change” but “we have to be ready to follow the data.”
The Fed’s staff forecasters are no longer predicting a recession for this year,” Powell noted. Instead, they foresee “a noticeable slowdown” in economic activity.
Economists are debating whether cooling the labor market—a key to quelling inflation—requires layoffs or if it could be achieved by employers simply offering fewer jobs and not firing people.
TREND FORECAST: The Federal Reserve, like much of the people in the Northern Hemisphere, are taking the summer off and will not really go back to work until September. The guess on The Street is that there is a one-in-five bet that the Fed will raise rates. Thus, the dollar will weaken if they do not raise interest rates and gold prices will increase.