- The recent interest rate hike by Federal Reserve touches 16 years high.
- Jerome Powell hints at a possible hike in September 2023.
On July 26, 2023, the Fed Reserve hiked interest rates by 0.25%, & chair Jerome Powell says reiteration of the hike could occur in September 2023. The interest rate was raised to counteract the rising inflation. Powell argues that the slow pace of the economy and the labor market called for the rise. The authorities also wish to meet the target of 2%.
0.25% Interest Rate Hike; Powell Says More to Come
As per the data, the recent hike is the 11th by the Federal Reserve in the last 12 meetings. This consistency sets the benchmark for overnight interest rates in the 5.25% to 5.50% range. A similar level of rates was last seen during the infamous housing market crash of 2007.
Fed argues that the Federal Open Market Committee (FOMC) will keep a stern eye on the developments. Moreover, it would assess the additional information and analyze its implications over the monetary policy.
The current Fed gesture differs slightly from its June 14, 2023 statement. The previous statement left the central bank’s policy options searching for the end of this tightening cycle.
The subsequent Fed Reserve meeting regarding interest rate hikes will take place in eight weeks in September 20233. Jerome Powell steered clear and made no promises regarding the possibility of another increase. If, meanwhile, inflation slows and the economy regains its lost strength, the hike would be zero or reversed.
In May 2023, the Federal Reserve hiked the interest rate by 25 basis points. At the time, there was also no signal of the hike wagon slowing down.
The Implication of Interest Rate Hike
In a press conference following the announcement, Jerome Powell said that Federal Reserve analyzed the incoming data before the decision. Also, a deep study of the data hints that the economy is slowly moving towards the “below-trend” growth phase. Moreover, this situation is imperative for the inflation rate to fall.
Key price metrics are still gaining with more than double the speed of the Fed’s target. Even though inflation is slowing down, the momentum led to minimal changes in the labor market, & the unemployment rate is still 3.6%. Economic growth surpassed the Fed’s estimated 1.8% trend rate. Powell acknowledged that inflation slowed from yesteryear numbers without seriously damaging the economy.
The Federal Reserve is in a tricky position; they need to balance the rate hike with the risk of going overboard. However, Powell argues that in the fight against inflation, there would be some economic losses. He further says that reducing inflation would come with a period of below-trend growth, along with softened labor market conditions.
In the previous meeting held between June 13-14, 2023, the Federal Reserve agreed that the inflation data was weaker than expected. However, the policymaker was ambiguous about reverting their decision to an interest rate hike. Experts argue that the decision taken then was to be on the safe side while avoiding further damage to the already wounded economy.
