The Federal Reserve raised rates again in July, marking the 11th increase since March 2022 and the highest rate since 2001.
The U.S. Central Bank approved a 25-basis-point increase on Wednesday, bringing the Federal Reserve’s benchmark rate to a range of 5.25% to 5.5%.
In its July 26 policy statement, Federal Open Market Committee (FOMC) members stated that they would “continue to assess additional information and its implications for monetary policy.”
Language in the FOMC statement was little changed from May or June but indicated that the Fed was open to more rate hikes in 2023 if incoming data supported the move. Some of the data points that the U.S. Central Bank is tracking include job gains, the unemployment rate, and long-term inflation at or below the Fed’s 2% target.
Despite headline inflation hitting 3% in June, PNC Senior Economist Kurt Rankin suggested to The Dallas Express in an email earlier this month that the Fed’s “hawkish tilt is likely to remain intact until an annualized trend below 2.0% has been established.”
According to Gus Faucher, chief economist at PNC, the “baseline forecast is for the FOMC to keep the fed funds rate in its current range into early 2024.”
“If the job market remains hot or if inflation doesn’t slow, the committee is likely to hike again later this year,” Faucher told The Dallas Express in an email note.
During Powell’s scheduled press conference on Wednesday, the Fed chair laid out his outlook on current market conditions and the chance of more economic tightening.
“We want to see economic growth running at moderate or moderate levels to help ease inflationary pressures,” Powell told reporters during the press conference. “[But] what our eyes are telling us is that policy has not been restrictive enough for long enough to have its full desired effects. We still think the process has a long way to go.”
Although the Federal Reserve is attempting to guide the economy without triggering a recession, Faucher believes the chances of actually achieving a soft landing are slim.
“Given the tightening in monetary policy to date, the most likely outcome is a mild recession in the US economy starting late this year or early next,” he told The Dallas Express in the email note.
However, “there is still a 40% probability that the US can avoid a near-term recession. Assuming there is a recession, the FOMC will start to cut the fed funds rate in early 2024 as inflation slows and the labor market deteriorates,” he wrote.
According to the Fed’s Summary of Economic Projections, or “dot plot,” published in June, participants project a Fed funds rate of 5.5% to 5.75% by the end of the year. This means the Fed members forecast an additional quarter-percentage-point increase later this year.
Since the federal funds rate is now at a restrictive level, Powell notes that some participants have already penciled in the chance of rate cuts in 2024. However, he seemed less confident that inflation would return to 2% in that short amount of time.
“We don’t see ourselves getting to 2% inflation until … 2025 or so,” Powell said.