The Federal Reserve Open Market Committee (FOMC) hiked the federal funds rate to the 5.25% to 5.50% range and announced a continuation of its balance sheet runoff.
The Fed updated its language to acknowledge the recent economic strength, stating “recent indicators suggest that economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.”
It also maintained its view that “tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”
All of the members of the FOMC voted in favor of the decision.
Key Implications
The Federal Reserve has hiked again after taking a brief pause in June. This move was widely expected with the Fed establishing a new cruising speed in its rate hiking cycle. Although the Fed gave itself extra time to assess whether the economy would turn under the weight of 500 basis points in rate hikes over the last 16 months, the economy has continued to exude surprising resilience.
What’s next? The Fed has not seen enough evidence from the economy that it can declare an end to the hiking cycle. The Fed’s own forecast shows that members think another hike is likely needed before year-end. Given the new slower pace of rate hikes, the Fed will likely hold rates steady at its next meeting in September. This will give the Fed a three-month window to monitor the economy before it decides whether it should hike again. If the labor market fails to weaken and/or core inflation fails to make the progress they expect, another 25 basis point hike would likely be on offer. As it stands, markets are giving this a 50/50 chance.
