US soft landing hopes rise as Fed raises rates again
Although the Federal Reserve’s latest interest rate hike on 26 July could be the last in this cycle, policy is likely to remain tight for some time to come.
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The Federal Reserve (Fed) hiked its policy rate by 25 basis points as expected on 26 July, 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 Jerome Powell’s press conference made clear that the Fed is committed to bringing inflation down to 2% so there is 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.
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 2023, 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 for 2023. 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.
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