Federal Reserve Signals Intent to Resume Interest Rate Increases
Federal Reserve officials have indicated their intention to resume interest rate increases in order to combat high inflation in the world’s largest economy. According to minutes from June’s meeting of the Federal Open Market Committee, the majority of officials believe that “additional increases” in the Fed’s benchmark interest rate would be appropriate. They cited the tight labor market and the upside risks to inflation as key factors shaping their outlook.
While some officials favored a 25 basis point increase in interest rates in June, the committee ultimately decided to pause further tightening due to uncertainty about the economic outlook. Fed officials expect growth to be subdued for the remainder of the year, with a mild recession predicted to begin later this year followed by a moderately-paced recovery.
The June meeting marked a break in the Fed’s campaign to address stubborn inflation after raising the benchmark interest rate at 10 consecutive meetings. Fed Chair Jay Powell justified the pause by stating that the effects of earlier rate rises still needed to fully impact the economy, in addition to the impact of turmoil among regional banks earlier this year.
However, it is widely expected that there will be additional rate increases this year, with most officials projecting the benchmark rate to eventually reach a range of between 5.5 and 5.75 percent. This could translate to two more quarter-point increases, with the first likely to occur at the Fed’s next meeting at the end of this month. Powell has not ruled out consecutive rate increases.
The persistence of price pressures, particularly in the services sector, and the strength of the US labor market are driving the likelihood of further rate rises. The Fed aims to dampen demand across the economy by raising borrowing costs. Officials believe that a period of below-trend growth and job losses will be necessary to achieve their inflation target of 2 percent.
Fed officials do not anticipate any rate cuts until 2024, as they expect “core” inflation to remain above their target. In May, the unemployment rate stood at 3.7 percent, but policymakers expect it to peak at 4.5 percent.
The next meeting of the Federal Reserve will take place at the end of this month, where further decisions regarding interest rates will be made.