There were no surprises yesterday when the US Federal Reserve (Fed) raised rates for the 11th time in 16 months to the highest level in 22 years. The question was whether this could be the last one for a while, a question that was partially answered by the Fed’s chief, Jerome Powell, who pointed out that inflation is still not at 2%.
Fed Raises Rates to 5.50%
The Fed’s decision yesterday to raise federal funds a quarter of a point to 5.50%, was generally in line with projections made by most analysts.
Markets found it more important to concentrate on the Federal Open Market Committee’s (FOMC) report and the remarks made by Jerome Powell.
Although monetary policy can already be viewed as restrictive, Powell emphasized that the Fed's primary goal is price stability, which entails bringing inflation to the 2% target. This goal has not yet been met.
Powell Stressed the Economy is Growing at a Moderate Pace
According to Powell, the repercussions of this monetary strategy have not yet been felt as the outcomes are always delayed.
Additionally, he noted that the economy is developing at a moderate pace, far from the recession that had been long predicted, and that the labour market is unusually strong, which seems counterintuitive given the tightening of monetary policy.
This partially answered the question of whether this was the Fed's final rate increase in the current series of hikes.
The Next Decision May Depend on PCE Figures
Powell stated that the Fed is willing to keep raising interest rates in its next sessions if the economic indicators justify it, particularly the core inflation figures and particularly personal consumer spending, which is currently at exceptionally high levels.
The core Personal Consumption Expenditure (PCE) numbers for the months of June and July will be released in the time between now and the subsequent meeting in September. They will likely determine the FOMC's next move. If they stay above the 2% objective or do not decline much, the likelihood of another 25-bps hike will be considerable.
Rate Hike Barely Affected Markets
The Fed's decision and words did not have a significant impact on the market. It may be argued that it was anticipated.
Despite the fact that the Fed has explicitly declared that it is willing to hike rates if the economic facts support such moves, Treasury yields scarcely changed and only very marginally declined.
The stock market indices, particularly the Nasdaq, which is most sensitive to interest rates, were somewhat more vulnerable to a scenario in which monetary policy will continue to be restrictive, though they later recovered to close flat. The Dollar did not experience much volatility either.
TECH100 monthly trading chart July 27, 2023. Sources: Bloomberg, Reuters
- US Fed raised interest rates from 5.25 to 5.50%
- Jerome Powell stated that the main focus is on price stability
- Inflation still not at 2% target
- Results of monetary policy still not seen, as they are always delayed
- US economy is growing at a moderate pace
- PCE figures could be a defining factor on the next rate decision
- Treasury yields and the US Dollar hardly moved on the news