Fed Raises Rates 25bp, Maintains Tightening Bias
The United States (US) Fed unanimously hiked its policy interest rate range 25 basis points as widely expected with a statement retaining the phrasing that further policy firming “may be appropriate”.
With two months’ worth of data to come before the next FOMC meeting, ING economists suspect evidence of slowing inflation and softer activity won’t make that necessary.
After categorizing the June pause as a slowing in the pace of rate hikes the Federal Reserve has unanimously voted to raise the Fed funds target range 25bp to 5.25-5.5%, the highest level for 22 years.
Markets and economists saw little chance of any other outcome with the main debate being whether the Fed might soften its language and move to a more neutral data-dependent stance.
“We felt that was a long shot and the Fed has indeed kept its tightening bias, indicating further policy firming “may be appropriate”.
Chair Powell again referred to the June forecast update signaling the likelihood of one further rate rise later in the year. Meanwhile, the statement described the activity as expanding at a “moderate pace”, job gains being “robust”, and inflation remaining “elevated”.
No room for relaxation when inflation is so high
“With two months until the next meeting, there was no need for the Fed to change its position. A dovish tilt would have led the market to latch onto the possibility of the Fed not hiking further”, ING economists said in an update.
Analysts said US Treasury yields and the dollar would have fallen significantly, which would loosen financial conditions in the economy – Given low unemployment, robust wage growth, and the fact that core inflation is still running at more than double the 2% target, such a market reaction would run counter to the Fed’s aims.
Instead, the Fed stuck with its hawkish bias with the press conference suggesting that the Fed’s mindset remains focused on ensuring that inflation returns to target sustainability even if that runs the risk of a recession.
Chair Powell again referred to the extra rate they included in their June forecast update, which would take the policy rate range to 5.5-5.75%, and stated that intermeeting data was broadly consistent with their expectations.
Markets, though, have their doubts with just five basis points of tightening prices for that September FOMC meeting with it being a 50-50 call whether there will be a 25bp hike by the November FOMC meeting. #Fed Raises Rates 25bp, Maintains Tightening Bias