SNAPSHOT2 min read

US soft landing hopes rise as Fed raises rates again

Although the Federal Reserve’s latest interest rate hike could be the last in this cycle, policy is likely to remain tight for some time to come.

27/07/2023
Las vegas landing

Authors

Keith Wade
Chief Economist & Strategist

The Federal Reserve (Fed) hiked its policy rate by 25 basis points as expected on Wednesday, taking the target range for the federal funds rate to 5.25% to 5.5%.

The move was strongly signalled ahead of the meeting by Fed speakers after the pause in tightening in June. This was the 11th hike in this cycle and takes the Fed funds rate to its highest since 2001.

Both the official statement and chair Powell’s press conference made clear that the Fed is committed to bringing inflation down to 2%. So there’s no sign of a shift in the central bank’s target.

Going forward, policy will be data-dependent as the Fed judges whether rates and financial conditions are now restrictive enough to achieve that aim, which Powell said could take some time. There will be two sets of inflation prints and two employment reports before the next meeting on 20 September.

The Fed chair played down the recent encouraging progress on inflation data somewhat, but he continues to believe that the Fed can achieve its target on inflation without a significant loss of jobs. The soft landing camp received another boost with the news that the Fed’s staff forecast for the economy no longer includes a recession.

At this stage the risks are still skewed toward another rate rise later in the year, with the market putting a probability of 30% on higher rates at the 1 November meeting (according to the CME Group).

The economy has slowed, but has proven more resilient than expected and we would note that the IMF has just upgraded its projections for the US and the world economy this year. However, the IMF’s forecasts for 2024 remain unchanged, which would mean two years of weak activity and Powell noted that the Fed staff are still looking for a noticeable slowdown in the US.

Our view remains that this will be the last hike in this cycle but we may be looking at a longer period of tight policy before the Fed can signal a pivot. As we have said before, it is in the central bank’s interests to keep a hawkish tone and prevent markets from loosening financial conditions until its goal is in sight. 

Subscribe to our Insights

Visit our preference centre, where you can choose which Schroders Insights you would like to receive.

Authors

Keith Wade
Chief Economist & Strategist

Topics

Economics
Economic views
Federal Reserve
Central banks
Interest rates
Inflation
Follow us

Please remember that the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

This marketing material is for professional clients or advisers only. This site is not suitable for retail clients.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security / sector / country.

Schroder Unit Trusts Limited is an authorised corporate director, authorised unit trust manager and an ISA plan manager, and is authorised and regulated by the Financial Conduct Authority.

On 17 September 2018 our remaining dual priced funds converted to single pricing and a list of the funds affected can be found in our Changes to Funds. To view historic dual prices from the launch date to 14 September 2018 click on Historic prices.