The US Federal Reserve made a significant move to combat above-target inflation by raising its benchmark lending rate on Wednesday to the highest level since 2001. The quarter-percentage-point increase was announced in response to the ongoing inflation surge and was in line with analysts' expectations.
Federal Reserve Chair Jerome Powell expressed the intention to maintain a restrictive policy until inflation showed sustainable progress towards the 2% target. He also hinted at the possibility of further rate hikes later in the year.
Policy to Tackle Inflation
Federal Reserve Chair Jerome Powell stated that the current policy measures have not been sufficiently restrictive for a significant period to yield their desired effects on inflation. As a result, the decision to raise the interest rates was taken to ensure inflation comes down sustainably to the target rate of 2%. Powell emphasized that the Fed is prepared to tighten monetary policy further if necessary.
Assessing Future Monetary Policy
The US central bank, in its official statement, asserted that it will continue to assess additional information and its implications for monetary policy. This suggests that there may be more rate hikes in the pipeline as officials closely monitor various economic indicators and data points to gauge the need for additional policy tightening.
Outlook for the Economy
Despite inflation moderating somewhat since last year, it still remains above the target rate. On the positive side, unemployment has remained low, and economic growth in the first quarter was revised upward due to strong consumer spending. The Federal Reserve anticipates maintaining high rates well into 2024, except in the case of a more pronounced economic slowdown and a rise in unemployment. Economic experts predict another rate hike in November, allowing ample time to assess the economy's cooling and any potential disruptions due to strikes.
Possibility of a "Soft Landing"
Recent positive economic news has raised hopes for a "soft landing," wherein the Federal Reserve can effectively reduce inflation by raising interest rates without causing a recession or surging joblessness. Chairman Powell remains optimistic about achieving this goal and reaffirms that a soft landing is possible. The Federal Reserve staff has revised their outlook, indicating a noticeable slowdown in growth later this year but no longer forecasting a recession due to the economy's resilience.
As the US Federal Reserve raises interest rates to combat inflation, it maintains a cautious eye on various economic indicators. The objective is to bring inflation down to the target level sustainably, and further tightening may be considered if required. The possibility of future rate hikes and the potential for a soft landing are key factors that will shape the economic outlook in the coming months. Investors will be closely monitoring the Federal Reserve's actions in the next meeting in September.