Fed Rate hike – A highly anticipated interest rate increase by the Federal Reserve called was approved on Wednesday, raising benchmark borrowing costs to their highest level in more than 22 years . in this blog we delve you how fed rate impact your daily life.

Fed Rate hike

Fed Rate hike impact on market

The Federal Open Market Committee of the central bank increased its funds rate by a quarter percentage point to a target range of 5.25%-5.5%, a move that financial markets had fully anticipated. The benchmark rate would be at its highest level since early 2001 at the middle of that target range.

The market was looking for indications that the increase might be the final before the Fed policymakers take a pause to assess the effects of the prior fed rate hikes on the economy. Markets have been pricing in a better-than-even chance that there won’t be any additional changes this year, despite officials’ statements at the June meeting that there would be two rate increases this year.

Chairman Jerome Powell stated at a news conference that although inflation has slightly subsided since the middle of last year, it “has a long way to go” to reach the Fed’s 2% target. However, he appeared to allow flexibility for the Fed to perhaps hold rates constant at its September meeting.

If the statistics called for it, Powell added, “I would say it’s certainly possible that we will raise funds again at the September meeting.” And I would also add that it’s conceivable that we might decide to maintain the status quo and, as I said, we’ll be making careful judgments at each meeting.

According to Powell, the FOMC would evaluate “the totality of the incoming data” and its effects on inflation and economic activity.

Following the conference, markets initially rose, but they ultimately finished neutral. The Dow Jones Industrial Average increased by 82 points as it continued its trend of higher closings, but the S&P 500 and Nasdaq Composite saw little change. Treasuries’ yields decreased.

The economy needs time to adjust to the effects of previous rate hikes, according to Joe Brusuelas, chief economist for the United States at RSM. We believe that improvement in the underlying pace of inflation, slower job creation, and weak growth are creating the conditions where the Fed can essentially stop its rate raise campaign now that the most recent 25 basis point rate increase is in the books.

However, the post-meeting statement merely made a passing mention of the principles that will direct the FOMC’s future actions.

A phrase from the previous month’s communication was modified to read, “The Committee will continue to assess additional information and its implications for monetary policy.” In recent public pronouncements, practically all central bank officials have endorsed a data-dependent strategy rather than a predetermined schedule.

 

Members of the voting committee unanimously voted in favor of the Fed Rate arise.

The upgrade of economic growth from “modest” to “moderate” during the June meeting was the only other noteworthy change in the statement, amid predictions of at least a mild recession in the near future. The statement once more referred to the inflation rate as “elevated” and the job growth as “robust.”

The increase marks the 11th fed rate increase since the FOMC started tightening policy in March 2022. The committee opted not to attend the June meeting as it considered the effects of the hikes.

Since then, Powell has reiterated his belief that inflation is out of control and stated that he expects additional “restriction” on monetary policy, which is code for further rate hikes.

What banks charge one another for overnight lending is governed by the fed funds rate. But it also contributes to a variety of consumer debts, including credit card debt, vehicle loans, and personal loans.

Since the early 1980s, when it was also confronting unusually high inflation and a faltering economy, the Fed has not been this aggressive with fed rate hikes.

Recent inflation-related news has been positive. In June, the consumer price index increased by 3% over the previous year, down from a rate of 9.1% in May. The most recent University of Michigan sentiment survey indicates that consumers are becoming more confident about the direction of prices, with an expectation for a 3.4% annual growth rate.

However, when food and energy are taken out, the CPI is growing at a rate of 4.8%. The CPI tracker maintained by the Cleveland Fed also predicts a 3.4% annual headline rate and a 4.9% core rate for July. The personal consumption expenditures price index, the preferred indicator of the Fed, increased 3.8% on the headline and 4.6% on the core in May.

All of those numbers are over the Fed’s 2% objective even if they are much below the worst levels of the current cycle.

Fed Rate hike

Main points of Fed Rate hike

  1. With the Federal Reserve’s approval, benchmark borrowing costs have increased to their highest level in more than 22 years.
  2. The target range for the fed rate will be between 5.25% and 5.5% after the quarter-point rise.
  3. Markets are pricing in a better-than-even likelihood that there won’t be any additional changes this year even though officials stated at the June meeting that two rate hikes are on the way this year.
  4. On a “meeting-by-meeting” basis, the central bank will make judgments based on evidence, according to chair Jerome Powell.

Despite the rate increases, economic growth has been unexpectedly durable.

Second-quarter The Atlanta Fed estimates that the pace of GDP growth is 2.4% on an annualized basis. Numerous experts continue to predict a recession over the next 12 months, although those predictions have thus far been at least untimely. Following a significant upward revision to early estimates, GDP increased by 2% in the first quarter.

Additionally, employment has endured amazingly well. In 2023, nonfarm payrolls increased by about 1.7 million, and the unemployment rate in June was a comparatively low 3.6%, which was the same as it was in the previous year.

That we will be able to accomplish inflation moving back down to our target without seeing the kind of really substantial downturn that causes huge levels of job losses has been Powell’s steadfast belief, he said.

The committee also said it would keep reducing the bond holdings on its balance sheet, which peaked at $9 trillion before the Fed started its quantitative tightening initiatives. This is in addition to raising interest rates. As a result of the Fed allowing up to $95 billion in maturing bond proceeds to roll off each month, the balance sheet has now reached $8.32 trillion.

No changes in during last few weeks.

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