The Fed’s Monetary Tightening: Halt, Expected Rate Increase, and Economic Outlook

The Fed halted its aggressive campaign of monetary tightening last month after 10 consecutive increases, in a move intended to give policymakers more time to assess the health of the US economy and the impact of recent bank pressures on lending conditions.

But after stopping in June, the Fed is expected to raise interest rates again by 25 basis points the day after tomorrow, bringing the interest rate to 5.5%, its highest level since 2001. Joseph Gagnon, a researcher at the Peterson Institute for International Economics, told AFP: If I had to bet, I would bet that they will raise the federal funds rate by 25 basis points at the next meeting.

The chief US economist at Bank of America, Michael Gabin, also predicted, in a note, an additional increase in interest rates this week, indicating that most members of the committee believe that there is a need for more rebalancing between supply and demand to ensure the stability of inflation.

Traders’ forecasts on the Fed Watch tool indicate a 99% chance that the US central bank will raise interest rates by a quarter of a percentage point at the July meeting. The annual rate of inflation slowed to 3% in June, while unemployment remained near record lows, and the Census Bureau revised up its first-quarter economic growth reading, on the back of stronger-than-expected consumer spending.

Positive economic news raised the chances of a so-called “soft landing,” which refers to the Fed’s success in reducing inflation by raising interest rates while avoiding recession and high unemployment.

Goldman Sachs recently cut the probability of the US economy entering a recession in the next 12 months to 20% from 25%, although it is still slightly above average levels since the Ukraine crisis erupted. “The latest data has reinforced our confidence that reducing inflation to an acceptable level will not require a recession,” Jan Hatzios, chief economist of the US investment bank, wrote in a note to investors. Fed officials indicated at the June meeting that they expect two more quarter-point hikes this year to tackle inflation.

After expecting a 25 basis point increase in US interest rates this month, analysts’ focus is turning to what the Federal Reserve might do at its September meeting, amid a split over the next interest rate decision.

Because of the uncertainty around the September meeting, economists will closely watch Fed Chair Jerome Powell’s press conference, which begins half an hour after the rate decision, for hints on what the Fed might do next.

“At the press conference, we look forward to more clarity on what the MPC needs to do to stop interest rate increases permanently,” Morgan Stanley economists wrote in a recent note to clients.

Statement

On: Monday – July 24, 2023

The Fed halted its aggressive campaign of monetary tightening last month after 10 consecutive increases, in a move intended to give policymakers more time to assess the health of the US economy and the impact of recent bank pressures on lending conditions.

But after stopping in June, the Fed is expected to raise interest rates again by 25 basis points the day after tomorrow, bringing the interest rate to 5.5%, its highest level since 2001. Joseph Gagnon, a researcher at the Peterson Institute for International Economics, told AFP: If I had to bet, I would bet that they will raise the federal funds rate by 25 basis points at the next meeting.

The chief US economist at Bank of America, Michael Gabin, also predicted, in a note, an additional increase in interest rates this week, indicating that most members of the committee believe that there is a need for more rebalancing between supply and demand to ensure the stability of inflation.

Traders’ forecasts on the Fed Watch tool indicate a 99% chance that the US central bank will raise interest rates by a quarter of a percentage point at the July meeting. The annual rate of inflation slowed to 3% in June, while unemployment remained near record lows, and the Census Bureau revised up its first-quarter economic growth reading, on the back of stronger-than-expected consumer spending.

Positive economic news raised the chances of a so-called “soft landing,” which refers to the Fed’s success in reducing inflation by raising interest rates while avoiding recession and high unemployment.

Goldman Sachs recently cut the probability of the US economy entering a recession in the next 12 months to 20% from 25%, although it is still slightly above average levels since the Ukraine crisis erupted. “The latest data has reinforced our confidence that reducing inflation to an acceptable level will not require a recession,” Jan Hatzios, chief economist of the US investment bank, wrote in a note to investors. Fed officials indicated at the June meeting that they expect two more quarter-point hikes this year to tackle inflation.

After expecting a 25 basis point increase in US interest rates this month, analysts’ focus is turning to what the Federal Reserve might do at its September meeting, amid a split over the next interest rate decision.

Because of the uncertainty around the September meeting, economists will closely watch Fed Chair Jerome Powell’s press conference, which begins half an hour after the rate decision, for hints on what the Fed might do next.

“At the press conference, we look forward to more clarity on what the MPC needs to do to stop interest rate increases permanently,” Morgan Stanley economists wrote in a recent note to clients.

Statement

2023-07-24 05:24:06
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