On Wednesday, the Federal Reserve increased its benchmark interest rate by 0.25% and indicated the possibility of further Fed hikes later in the year.
The recent rate increase on Wednesday has pushed the Fed’s policy rate, known as the Fed funds rate, to a new range of 5.25%-5.50%. This marks the highest level since March 2001.
Fed hikes the rates for the 11th time since March 2022 after keeping them steady in June. The Fed indicated that future Fed hikes will depend on economic and financial developments. The decision to hike rates was unanimous. Wednesday’s rate hike follows this approach.
The Fed emphasized considering cumulative monetary tightening to achieve 2 percent inflation. They will assess the impact of monetary policy on economic activity and inflation, along with economic and financial developments.
The Committee aims to determine the appropriate extent of additional policy firming for inflation targeting. The Fed’s approach involves considering various factors to achieve its inflation objectives.
Jay Powell, Fed Chair
In a press conference, Fed Chair Jay Powell stated that achieving 2% inflation will take time. He mentioned that it may require a period of below-trend growth and some softening in the labor market.
When asked about raising rates on an alternate meeting basis, Powell stated no decision has been made. The option hasn’t been considered, and they’ll assess each meeting independently. They plan to approach each meeting with the same set of questions.
Fed officials said they will continue evaluating data and its impact on monetary policy. Furthermore, they emphasized their view of inflation as “elevated” and their vigilance towards inflation risks. Despite milder inflation reading in June, they remain attentive to the situation. Consequently, the Fed’s commitment to monitoring additional information continues.
Inflation Data from June
In June, officials projected two Fed hikes for H2 2023 due to increased core inflation expectations. The Fed now anticipates year-end inflation near 4%, surpassing its target. The previous projection was 3.6%.
Earlier this month, “core” inflation increased 4.8% YoY in June, excluding food and gas. Including food and energy, headline inflation rose 3% YoY, the slowest since March 2021, and down from last year’s peak of 9%.
Core inflation remained sticky due to surging rent prices last month. Additionally, both rent and owners’ equivalent rent rose on a seasonally adjusted basis. The rent index increased by 0.5%, while owners’ equivalent rent rose by 0.4%. This index represents the hypothetical rent for homeowners.
Moreover, the shelter index, a significant component of core inflation, rose 7.8% annually. On a seasonally adjusted basis, it increased by 0.4% between May and June. The shelter index accounted for over 70% of the monthly core inflation increase.
Furthermore, the motor vehicle insurance index rose 1.7%, and the apparel index increased by 0.3% in June. Similarly, recreation and personal care indexes also saw increases, as noted by the BLS.
On the other hand, airline fares fell 8.1% and used car prices dropped 5.2% year-over-year. Meanwhile, the energy index decreased by 16.7% over the past 12 months.
However, in June, energy prices increased 0.6% on a seasonally adjusted month-over-month basis. May’s report had seen a decline of 3.6% in energy prices.
Rent price surges contribute substantially to the ongoing sticky core inflation. The shelter index trend highlights housing costs’ impact on inflation.
FED Acknowledges the Challenges
Officials upgraded their economic assessment, now characterizing growth as “moderate.” The Fed stated that recent indicators show moderate expansion in economic activity. Job gains have been robust, and the unemployment rate remains low. However, inflation continues to be elevated, drawing attention from the Fed.
During the press conference, Powell mentioned the Fed’s staff economic forecasts. These forecasts differ from the Summary of Economic Projections produced by Fed officials.
According to the staff forecasts, the US economy is no longer projected to fall into recession this year. Consequently, the change in economic characterization reflects an improved outlook compared to the previous meeting.
Nevertheless, despite overall growth, the Fed acknowledges the ongoing challenges of elevated inflation. On the positive side, the robust job gains signal positive developments in the labor market. Additionally, Powell’s remarks indicate that the Fed is closely monitoring economic conditions.
Moreover, the unemployment rate remaining low is considered a positive factor. However, inflation’s persistently high levels warrant attention from the central bank.
Furthermore, the staff’s optimistic economic forecasts reflect a more optimistic view of the US economy. The Fed’s updated assessments point to a moderate but cautiously optimistic economic outlook.