FED Implements Highest Interest Rates Since 2001 and Hints at Future Hikes

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The US Federal Reserve took decisive action on Wednesday, raising its benchmark lending rate to the highest level seen since 2001 in an effort to tackle inflation that has exceeded target levels. The central bank also provided a strong signal that further rate hikes could be on the horizon, given the improving economic outlook.


Fed Chair Jerome Powell addressed reporters following the quarter percentage-point rate increase, stating, "Policy has not been restrictive enough for long enough to have its full desired effects. So we intend, again, to keep policy restrictive until we're confident that inflation is coming down sustainably toward our two percent target — and we're prepared to further tighten if that is appropriate."


The recent hike, which followed a brief pause in June, brings the key lending rate to a range between 5.25 percent and 5.5 percent. The Federal Reserve issued a statement indicating it will continue to assess additional information and its implications for monetary policy, suggesting the possibility of more tightening measures in the future.


"We're going to be going meeting by meeting," Powell emphasized.


During the previous meeting of the rate-setting Federal Open Market Committee (FOMC) in June, the median forecast anticipated two additional rate hikes this year. The latest rate increase, in line with analysts' predictions, marks the 11th since the Federal Reserve initiated an aggressive campaign of monetary tightening in March 2022 in response to mounting prices.


Despite a decline in inflation since the June decision to pause rate hikes, the rate remains above the target, indicating the potential need for further policy action.


"Inflation has moderated somewhat since the middle of last year," Powell stated, while cautioning, "the process of getting inflation back down to two percent has a long way to go."


Conversely, unemployment has remained close to historic lows, and economic growth for the first quarter showed robust figures due to resilient consumer spending data.


"The Fed will stand its ground and hold rates high well into 2024, barring a more pronounced slowdown in the economy and rise in unemployment," noted Diane Swonk, KPMG US's chief economist, in response to the Fed's decision.


Swonk highlighted the goal of not just cooling inflation but defeating it, with KPMG expecting another rate hike in November to assess the economy's cooling and potential risks.


The recent positive economic developments have increased the chances of a "soft landing," wherein the Federal Reserve successfully reduces inflation by raising interest rates, thereby avoiding a recession and a surge in joblessness.


On Wednesday, Powell reiterated his belief in the possibility of a soft landing, stating, "It has been my view consistently that we do have a shot. That's been my view, that's still my view."


Powell also informed reporters that the staff's expectation of a recession starting later this year had diminished, noting a noticeable slowdown in growth in their forecast but no longer projecting a recession due to the economy's resilience.


Investors had largely anticipated the rate hike on Wednesday, but their confidence regarding another increase at the next Fed meeting in September was less assured.


According to CME Group, futures traders currently assign a probability of just over 20 percent that the FOMC will raise rates again in September.


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