Likely hike Fed to raise rates to highest level since 2001, Jerome Powell prepping another increase

Likely hike Fed to raise rates to highest level since 2001, Jerome Powell prepping another increase

The Federal Reserve’s Rate Increase: What to Expect and What it Means for the Economy

The Federal Reserve, popularly known as the Fed, is soon expected to announce its 11th rate increase in the last 17 months. This rate hike would bring the Fed’s short-term rate to approximately 5.3%, the highest level seen since 2001. As with the previous rate hikes, this increase is likely to have an impact on various aspects of the economy, including mortgages, auto loans, credit cards, and business borrowing costs.

Despite the positive news that has boosted consumer confidence, sent stock prices soaring, and brightened hopes for a smooth economic landing, another rate hike is widely expected. Inflation, which stood at a mere 3% in June compared to the previous year, has significantly decreased from its peak of 9.1% in June of the previous year. Consumers continue to spend more, filling up airplanes, exploring international destinations, and flocking to concerts and movie theaters. The unemployment rate remains near historic lows as businesses continue to expand their workforce.

However, the anticipated rate hike by the Fed points to the potential dangers that still lie ahead. Underlying inflation, excluding volatile food and energy costs, known as “core” inflation, rose by 4.8% in June compared to the previous year. As long as such measures remain elevated, the Fed will likely feel compelled to keep interest rates high or even raise them further.

The central bank’s policymakers had previously signaled their intention to impose two more rate increases, including the one expected this week. However, some economists are concerned about the potential negative consequences of multiple rate hikes, fearing they could trigger a painful recession.

The big question that Chair Jerome Powell will face at the press conference is whether and when the Fed may decide to halt the current cycle of rate increases. While few expect Powell to reveal his cards, he will likely emphasize that future rate decisions will depend on incoming economic signals in the months leading up to the next Fed meeting scheduled for September.

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By then, policymakers will have access to more data, including two additional monthly inflation reports, updates on employment and unemployment, and further information on consumer spending and wages. Additionally, Powell is expected to share his insights at the annual gathering of central bankers in Jackson Hole, Wyoming, where he may provide more significant indications of potential shifts in Fed policy or strategy.

Although Powell has stressed that interest rate decisions will be made on a meeting-by-meeting basis, some analysts believe the Fed might skip a rate increase at its September meeting, similar to what occurred in June. This would leave open the option of implementing a quarter-point hike during the following meeting in November.

Most economists, however, predict that inflation, as well as the overall economy, will have sufficiently cooled down by November, thus making another rate hike unnecessary. In this scenario, the rate increase expected this week could mark the last one for this year.

It is worth noting that the Fed started tightening credit earlier than many other central banks in developed countries. Nevertheless, several countries, such as the European Central Bank, are now following a similar path, with the expectation of announcing their own rate hikes. Although inflation has decreased across the 20 countries that use the euro, it remains higher there than in the United States.

While the Bank of Japan is expected to retain its policies unchanged in its upcoming meeting, despite a slight increase in prices after two decades of decline, the Bank of England has been one of the most aggressive in Europe, having raised its key rate to a 15-year high of 5% last month. In the United Kingdom, inflation has persistently remained high, reaching 8.7% in May compared to the previous year.

On Friday, the U.S. government is set to release new data on consumer spending in June and an update on the Fed’s preferred inflation gauge. The inflation measure is projected to have slowed to 3% compared to the previous year, aligning with the most recent figure reported for the government’s well-known consumer price index. This would represent a significant drop from the 3.8% increase observed in May.

Overall, the impending rate increase by the Federal Reserve reflects its careful monitoring of inflationary pressures and its commitment to maintaining a stable and healthy economy. While the decision to raise rates can have short-term implications for various sectors, it is aimed at ensuring long-term sustainability and averting any potential economic downturn.