US Fed Poised to Hike Interest Rates to 22-Year High

Bullion Bite

A potential move by the US Federal Reserve to escalate interest rates this Wednesday, marking a stringent monetary policy not seen in 22 years, comes after signs of easing inflation amidst a brief hiatus in June.

The respite followed a vigorous year of consistent hikes that saw ten consecutive increases. The intention behind this breather was to permit officials the necessary time to appraise the state of the US economy, with specific attention to the influence of recent strains in the banking sector on lending conditions.

Subsequent weeks brought uplifting news of economic growth and tempered inflation metrics, thereby strengthening the probability of the Fed's decision-making committee endorsing an increase of a quarter percentage-point during the July 25-26 deliberations.

If approved, this change will drive the federal funds rate into the 5.25 to 5.5 percent bracket, a zenith unseen since 2001.

Joseph Gagnon, a distinguished fellow at the Peterson Institute for International Economics (PIIE), in conversation with AFP, stated that he would confidently anticipate the 25 basis points hike in the Fed funds rate at the upcoming meet. Echoing his sentiment, Michael Gapen, the chief US economist at Bank of America, stated in an investor brief that "the economic cooldown is an unhurried process."

Gapen believes that the majority of committee members are of the opinion that additional adjustments are required for equilibrium between supply and demand, thereby ensuring a steady disinflation process, another indication of his expectation for a further hike this Wednesday.

Market forecasts, according to CME Group, put the probability of the Fed raising its base rate by 25 basis points at its next meeting at over 99 percent. Nevertheless, uncertainties still linger concerning how far the Fed might have to stretch within this year to bring inflation back to its perennial two percent target.

The pause taken by the Fed in June saw its preferred inflation indicator soften to under four percent annually, with unemployment statistics persistently hovering near all-time lows. A consequent significant upward revision of the first quarter's economic growth—owing to robust consumer spending—propagated optimism of a 'soft landing,' where a recession and unemployment spike are averted as the Fed combats inflation via interest rate hikes.

As a testament to this, Deutsche Bank economists recently noted, "The distinction between a minor recession and a soft landing is increasingly subtle, with the likelihood of the latter undeniably escalating." Goldman Sachs responded to this trend by reducing its 12-month US recession forecast from 25 percent to 20 percent, although this figure still marginally surpasses average postwar levels.

Meanwhile, attention is drawn towards the Federal Reserve's next steps, given that the impending rate hike is widely anticipated. Predictions vary between a successive hike at the Fed's forthcoming September meeting and a decision to maintain the status quo.

Joseph Gagnon from PIIE postulated, "Albeit they're advancing at a steady pace—25 basis points per meeting or perhaps every alternate meeting—I don't anticipate a halt." Jerome Powell, the Fed Chair, will face scrutiny during the post-decision press conference due to the ambiguity surrounding the September proceedings. As noted by economists at Morgan Stanley, "We anticipate Chair Powell to offer greater clarity regarding the benchmarks required for the Committee to confidently transition into a prolonged hold phase."

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