The Federal Reserve has given its blessing to an expected interest rate rise that takes benchmark borrowing costs to the highest they have been in more than 22 years. The quarter percentage point rise will place the fed funds rate between 5.25%-5.5%. Even though it was assumed at the June meeting that two rate hikes would take place this year, it is more likely than not that no further changes will happen. Chair Jerome Powell said that any decisions made by the central bank will be based on the data per "meeting-by-meeting".
The Federal Reserve on Wednesday approved a much-anticipated increase of the interest rate, with the benchmark borrowing costs rising to their highest level in over 22 years. The Federal Open Market Committee raised the funds rate by a quarter point, settling on a target range of 5.25%-5.5%. The midpoint of this target range would be the highest level for the benchmark rate since early 2001. Markets were expecting a hike, so this move did not come as a surprise.
At the press conference, Chairman Jerome Powell said that while inflation has moderated since the middle of last year, the Fed's 2% target is still a long way off. However, he left some wiggle room for the possibility of not raising the rate at the September meeting, depending on the incoming data. The FOMC's post-meeting statement highlighted that the rate decision will be based on the totality of the data and their implications for economic activity and inflation.
The decision was unanimous, with the only other alteration in the statement being an upgrade to "moderate" from "modest" in the assessment of economic growth, despite predictions of a mild recession in the near future. The statement still described inflation as "elevated" and job gains as "robust".
The current rate hike is the 11th since the tightening process began in March 2022, and the Fed has not been as aggressive with rate hikes since the early 1980s. Economic data recently has been encouraging, with inflation lower than last year and a surprisingly resilient GDP growth, despite the rate hikes. Nonfarm payrolls have increased by 1.7 million year-to-date, and unemployment in June was a relatively mild 3.6%.
In addition to the rate hike, the committee indicated that it will continue to reduce bond holdings on its balance sheet, which had peaked at $9 trillion before the quantitative tightening efforts began.
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