Federal Reserve Resumes Interest Rate Hikes
The central bank agreed to a 25 basis point increase in July after electing to not raise the federal funds rate in June.
- Following a skip at its June meeting, the Federal Reserve (Fed) chose to raise the federal funds rate by 25 basis points (bps) at the July 2023 Federal Open Market Committee (FOMC) meeting.
- The 25 bps increase lifts the federal funds rate to 5.25%-5.50%.
- The Fed's cumulative total increase is now at 525 bps since March 2022, with a total of 100 bps of increases occurring in 2023.
- Fed Chair Jerome Powell reaffirmed that the central bank is strongly committed to bringing inflation down to its 2% target.
- Further tightening, if warranted, will be assessed on a meeting-by-meeting basis by the FOMC.
After breaking its string of 10 consecutive interest rate hikes in June, the Fed elected to raise the federal funds rate by 25 bps at its July 26, 2023, FOMC meeting.
The latest adjustment, which was largely expected by the markets prior to the official announcement, moves the Fed’s cumulative total increase to 525 bps since March 2022, and the federal funds rate bumps up to 5.25%-5.50%, the highest range in over 22 years.
“For the most part, the outcome of this Fed meeting was well telegraphed, with the Fed raising interest rates a quarter of a percent – the 11th tightening in this cycle – to the highest level in 22 years and suggesting flexibility and patience in regard to any additional moves at their next meeting in September,” said Raymond James Chief Investment Officer Larry Adam. “The Fed wants to evaluate additional data – including two additional jobs reports – and [according to Fed Chair Powell] ‘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’ before determining the future path of rates.”
The Fed’s decision to skip a rate increase in June came with the caveat of signaling that future rate hikes would be necessary, as the central bank remains committed to driving inflation down to its stated 2% target. July’s increase reinforced that stated direction. In his post-meeting press conference, Fed Chair Powell stated: “We have covered a lot of ground and the full effects of our tightening have yet to be felt. The process of getting inflation down to 2% still has a long way to go.”
“With this decision, Fed officials seem to be relying more on what previous dot plot estimates say about the future path of the federal funds rate than what the economic numbers are actually showing,” said Raymond James Chief Economist Eugenio Alemán. “Fed Chair Powell acknowledged that they were increasing the federal funds rate according to what the dot plot had indicated during the June Summary of Economic Projections release.”
Although Powell indicated that the 525 bps of increases over the last year and a half have not yet had time to completely affect economic activity, he indicated that the Fed was prepared to continue to increase the federal funds rate if the numbers warrant. Powell also said Fed policy “has not been restrictive enough for long enough.”
If there is no change in the dot plot in September, the Fed is expected to take the federal funds rate one notch higher to 5.75% at either their September, October/November, or December FOMC meeting.
“From a market perspective, the Fed’s decision and Fed Chair Powell’s press conference were essentially a non-event as the equity and bond market saw a very muted response to these events, highlighting that the Fed acted as anticipated,” said Adam.
All expressions of opinion reflect the judgment of the Raymond James Chief Investment Officer and Raymond James Chief Economist and are subject to change.
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