After a brief pause in June, the US Federal Reserve is widely anticipated to increase interest rates once again on Wednesday, implementing its most restrictive monetary approach in 22 years, despite recent indications of a slowdown in inflation.
After a series of 10 consecutive rate hikes in just over a year, the Fed suspended its aggressive tightening of monetary policies last month to allow policymakers more time to evaluate the state of the US economy and the impact of recent banking stresses on lending conditions.
In the weeks since, positive improvements in economic growth and more moderate inflation data have strengthened the likelihood of the Fed’s rate-setting committee voting for a 0.25 percentage-point hike on July 25-26. This move would push the federal funds rate to a range between 5.25 and 5.5 percent, the highest level since 2001.
Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics (PIIE), expressed his belief that the Fed would likely raise the Fed funds rate by 25 basis points at the upcoming meeting.
Bank of America’s chief US economist, Michael Gapen, highlighted that although the economy’s cooling is gradual, further rebalancing of supply and demand is deemed necessary by most committee members to ensure continued disinflation, which supports the expectation of another rate hike on Wednesday.
Futures traders on CME Group now assign a probability of over 99 percent for the Fed to raise its base rate by 25 basis points at the next meeting.
While a rate hike in July is now widely expected, uncertainty lingers about how much more the Fed will need to act this year to bring inflation back to its long-term target of two percent.
Since the Fed’s decision to pause in June, the preferred measure of inflation has slowed to less than four percent year-on-year, while unemployment has remained close to record lows. Additionally, economic growth has been significantly revised upward for the first quarter due to stronger-than-expected consumer spending.
The favorable economic developments have increased the possibility of achieving a “soft landing,” in which the Fed manages to reduce inflation by raising interest rates while avoiding a recession and surging unemployment.
Deutsche Bank economists noted that they perceive the line between a mild recession and a soft landing to be increasingly delicate, with the likelihood of the latter outcome rising.
Goldman Sachs, too, lowered its probability of the US economy entering a recession in the next 12 months to 20 percent from 25 percent, although it remains slightly above average postwar levels. The bank’s chief economist, Jan Hatzius, expressed confidence that bringing inflation down to an acceptable level would not necessitate a recession.
During its June meeting, Fed officials indicated that they expect two more 0.25 percentage-point rate hikes to be necessary this year to tackle inflation.
With the first interest rate hike widely expected on Wednesday, analysts are now focused on the Fed’s future actions. Some economists predict another rate increase as early as the Fed’s September rate meeting, while others believe the Fed may maintain interest rates at their current levels.
Joseph Gagnon from PIIE opined that although the Fed may proceed cautiously, implementing 0.25 percentage-point hikes at each meeting or every other meeting, they are unlikely to stop their tightening cycle.
Due to the uncertainty surrounding the September meeting, all eyes will be on Fed Chair Jerome Powell’s press conference after the rate decision, hoping for hints about the US central bank’s next steps.
Morgan Stanley economists stated that they anticipate Chair Powell to provide greater clarity on the indicators the Committee would need to see to feel comfortable about entering an extended hold period.
{Matzav.com}
The Federal Reserve and IRS are a hoax – Neither are part of the USA. The Federal Reserve has been seized and under control of the White Hats. We’ll hear about it soon with the upcoming EBS.