The Federal Reserve just raised interest rates by another 75 basis points, putting the total at 225 basis points since March.
Now that the Federal Reserve has raised interest rates by another 75 basis points (0.75 percentage point), putting its total tightening at 225 basis points since March, what’s the central bank going to do now?
The Fed’s statement Wednesday said it “anticipates that ongoing increases in the target range will be appropriate.”
And in his news conference, Fed Chairman Jerome Powell said, “It’s likely that [the central bank’s rate hikes’] full effect hasn’t been felt by the economy. So there’s probably some significant additional tightening in the pipeline.”
That all certainly sounds hawkish and it’s backed up by recent inflation numbers. The consumer price index soared 9.1% in the 12 months through June, the highest increase in 40 years.
The Fed’s favored inflation indicator, the personal consumption expenditures price index, climbed an annualized 7.1% in the second quarter, or 4.4% excluding food and energy.
Strong Employment Data
Employment data also are strong. Nonfarm payrolls jumped 372,000 in June, with unemployment remaining at a paltry 3.6%.
So one can certainly argue that stock and bond markets got it wrong in rising Wednesday afternoon on anticipation of a slowdown in Fed rate increases.
“The markets clearly think the net of today [Wednesday] is that the Fed will end up doing less tightening, but it was hard to come away from the Fed press conference thinking the Fed delivered a dovish pivot,” NatWest Markets analysts wrote in a commentary cited by Bloomberg.
“If anything, based on what we heard today, the median Fed member’s view on the path of the Fed funds rate over the remainder of this year could conceivably be higher.”
But Powell did say that the central bank will slow rate hikes at some point. Regarding the Fed’s next meeting, in September, he said, “while another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then.”
A Lot Can Happen by September
Given that the Fed’s stance is data-driven, weak data between now and the Sept. 20-21 meeting could lead it to dial back its rate hikes.
Two employment reports, two CPI reports and two PCE price indexes are scheduled before then.
If the numbers come in weak, the Fed may back off its heavy rate lifting. On the inflation side, gasoline prices have peaked, and some major retailers, bulging with inventories, are putting items on sale.
The labor market, too, is showing some signs of weakness, with companies from Meta Platforms (META) – Get Meta Platforms Inc. Report to CVS Health (CVS) – Get CVS Health Corporation Report cutting back their payrolls.
So it’s something of a mixed bag for the Fed. But the central bank has made clear that it won’t let up on the rate hikes until inflation is quelled. And that is likely to happen only when unemployment increases.
