In a bold move to combat surging inflation, the Federal Reserve has decided to resume its rate-rising campaign, lifting its benchmark interest rate by a quarter-point to a range of 5.25-5.5 per cent. This marks the 11th hike in the central bank’s anti-inflation crusade that commenced in March 2022, taking borrowing costs to the highest level seen in the past 22 years.

Fed Chair Jay Powell had hinted at a more gradual approach to rate increases in June, but with inflation remaining stubbornly elevated, the Federal Open Market Committee (FOMC) has once again turned its attention to aggressive monetary tightening. This recent increase comes after a temporary pause at the previous meeting, during which the Fed assessed the repercussions of earlier rate hikes and a regional banking crisis.

The committee remains cautious about the potential risks of inflation and is closely monitoring economic indicators. The recent gains in employment have been robust, and overall economic activity is expanding at a moderate pace. Nevertheless, the FOMC continues to tread carefully, considering further rate hikes if necessary, to steer inflation down to its longstanding target of 2 per cent.

The journey to curb inflation hasn’t been without challenges, as the US economy has proven to be more resilient than initially anticipated. While the labor market has cooled, it remains strong, bolstering consumer spending. While headline inflation has eased due to the decline in energy and food prices, “core” measures excluding these volatile components continue to exceed the Fed’s target.

Some experts believe that the recent rate hike might be the last of the current tightening cycle, as the central bank faces growing concerns over slowing down the economy excessively, which could lead to a recession. The Fed has heavily signaled its commitment to fighting inflation, but market participants remain skeptical about further rate hikes this year. They are currently pricing in the possibility of a rate reduction next year, which highlights the uncertain path ahead.

The upcoming September meeting is crucial, where the Fed will have more data on inflation, job market trends, and consumer spending to make its next move. Christopher Waller, a prominent member of the FOMC, has declared that the September gathering will be a “live meeting,” indicating that the Fed could potentially raise rates once again. However, many economists believe the bar for additional tightening in September is high, and if required, any further rate increases might be more likely during the November meeting.

The financial world is eagerly observing the central bank’s actions, anticipating their impact on the economy, financial markets, and borrowing costs. As the Fed pursues its mission to tame inflation, the delicate balancing act between controlling price rises and maintaining economic growth remains at the forefront of its monetary policy decisions.

By: Montel Kamau Serrari Financial Analyst 26th July, 2023

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