FED Anticipated to Implement the Highest Interest Rates in Over Two Decades

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In an effort to combat inflation, the US Federal Reserve is on the verge of unveiling a fresh quarter percentage-point increase to its benchmark lending rate on Wednesday. This move comes after the central bank paused its aggressive monetary tightening, which had seen 10 consecutive rate hikes, granting policymakers additional time to assess the nation's economic health.

Despite the recent pause, members of the rate-setting Federal Open Market Committee (FOMC) indicated at the June meeting that there might be two more interest rate hikes this year.

Ryan Sweet, the chief US economist at Oxford Economics, conveyed in a note to clients that "The forecast is for the Federal Open Market Committee to hike the target range for the fed funds rate by 25bps but maintain a bias toward additional rate hikes, if needed."

If Wednesday's rate hike is implemented, it will mark the 11th increase since the cycle of monetary tightening began in March of the previous year, propelling the Fed's benchmark lending rate to a range between 5.25 and 5.5 percent — its highest level in 22 years.

Futures traders are overwhelmingly confident, with close to a 99 percent probability, that the quarter percentage-point hike will proceed, based on data from CME Group.

Throughout the period since the rate hike pause in June, inflation has been declining, albeit remaining above the Fed's long-term target of two percent. Conversely, unemployment has remained at historic lows, and the economic growth in the first quarter received a substantial upward revision, largely due to resilient consumer spending data.

This more positive economic outlook has bolstered the prospects of achieving a "soft landing," wherein the Fed successfully curbs inflation by raising interest rates, while skillfully avoiding a recession and a surge in unemployment.

With expectations of the rate hike being almost unanimous, the focus now turns to closely scrutinizing Fed Chair Jerome Powell's statements for any hints about the central bank's future moves.

Edward Moya, senior Americas market analyst at OANDA, mentioned in a recent note that "They will probably signal that they want to see the impact of the current tightening cycle and that they will probably skip raising rates in September."

"They will likely be clear in suggesting that more tightening could very well happen," he added.

Agreeing with this sentiment, Ryan Sweet opined, "Odds are that Powell will signal additional rate hikes are not off the table, but the Fed will take a more cautious approach, conveying it will skip a hike in September."

Several FOMC members have expressed their support for further hikes this year, especially if the recent positive inflation data turns out to be a temporary occurrence.

Federal Reserve governor Christopher Waller stated during a banking conference in mid-July, "I see two more 25-basis-point hikes in the target range over the four remaining meetings this year as necessary to keep inflation moving toward our target."

Although markets have already factored in the likelihood of a rate hike on Wednesday, there is less confidence regarding the possibility of another hike at the next meeting in September.

According to CME Group, futures traders presently assign just over a 20 percent probability for the FOMC to raise rates further in September.

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