The Federal Reserve has enacted its 11th interest rate hike In 16 months—raising rates to the highest they have been in 22 years.
Key Details
- On Wednesday afternoon, Fed Chair Jerome Powell announced that interest rates would be hiked by another 25 Basis Points to a new borrowing rate range of 5.25% to 5.5%.
- Interest rate hikes were paused for the June Fed meeting, with analysts hoping that July’s hike will be the final hike for 2023, but Goldman Sachs predicts inflation hikes could result in additional interest rate hikes.
- Powell remained uncertain about further hikes at September’s Fed meeting, saying “it’s certainly possible that we will raise [rates] again,” but not committing to another hike.
- Powell promised that the Fed will continue its data-dependent approach to determine its future policy decisions on a monthly basis, nothing that the full effects of the hikes have not taken effect yet.
- June’s inflation rate was announced at 3% yearly increases, well above the Fed’s goal of 2%. The Bureau of Labor Statistics will announce July’s rate on August 10.
Why It’s Important
Wednesday’s announcements do not speak to the Fed’s overall confidence in the near future, with limited promises about reduced hikes and further reiteration of the Fed’s stated goal of slowing the economy to reduce the rate of inflation growth. Powell clearly does not see a possibility of reducing interest rates this year and expects that the Fed’s monetary tightening will need to continue well into next year.
While June’s numbers came come in strong and offered an optimistic view of the economy going into the second half of the year, the Fed remains concerned that the final percentage point decrease is going to be sticky and difficult to break. It recognizes the negative impacts this could have on the labor market, potentially sparking a recession in the process, and acknowledges the effect it is having on the economy. Further aggressive hikes could spark a deep recession.
“The worst outcome for everyone, of course, would be not to deal with inflation now [and] not get it done. Whatever the short-term social costs of getting inflation under control, the longer-term social costs of failing to do so are greater, and the historical record is very, very clear on that,” says Powell.