It is forecasted widely that the Federal Reserve will give their approval to a further increase in interest rates on Wednesday, taking the key borrowing rate to its highest level since early 2001.The most pressing matter, however, will be if the Federal Open Market Committee officials determine they have gone far enough with the rate hikes.Boosting these rates any higher comes with a risk of a weakening economy that a number of analysts believe may lead to a moderate economic downturn.
Investors are hoping Wednesday will bring the Federal Reserve's 11th interest rate increase since March 2022, with a quarter percentage point hike taking the benchmark borrowing rate to a target range of 5.25%-5.5%. If achieved, this would be the highest level of the federal funds rate since January 2001. Nevertheless, it remains uncertain whether the Federal Open Market Committee officials deem further action to be necessary in combating inflation. Kathy Jones of Charles Schwab is quoted as saying, "The signal will probably be, yes, we're hiking, but then we think we can sit here for a while and see. But no promises. They can't give up the option." This is especially true given the potential risks a more prolonged rate hike could pose for an economy that is thought to be headed toward a mild recession.
Jones is among a growing number of market observers who think the central bank has done enough. The June inflation rate of 3% is lower than its level of 9.1% a year ago, and they fear any additional tightening could push the economy into contraction. "The Fed should already be finished with action," said Jones. "The decision should be to take a break and observe. Apparently, though, the Fed still feels a need for further tightening." In their last meeting, policymakers strongly signaled the likelihood of two more rate hikes this year, and have done little since then to change that view.
Despite the Fed's intentions, markets have been largely unfazed. The Dow Jones Industrial Average has surged over the past month, up 5% in the same period. Investors may be paying scant attention to the Fed's warnings, with CME Group's FedWatch futures market gauge indicating only a 35% chance of another hike before the end of 2019. It is therefore expected that Fed Chairman Jerome Powell will declare that the FOMC will forgo a hike at their September meeting, and will instead examine the impact that past increases have had. Wilmington Trust Investment Advisors chief economist Luke Tilley also believes that any hike this Wednesday will be unnecessary, and that as time passes, the conclusion will become even more apparent.
The Federal Reserve's policy has been based on the notion that it is better to tackle inflation with an excess of caution rather than underestimating the threat it poses. The US and several developed countries have been confronted with the most intense period of inflation since the 1980s, which has influenced the Fed's way of thinking as it has reminded them of the dangers of prematurely withdrawing from the battle against inflation. Tilley commented on this, expressing apprehensions that if he was in the place of the policymakers, he may very well make the same decisions due to the risk management involved. The need for striking a balance between not retreating too soon from the inflation fight and risking a recession is clear.
Recent economic indicators point to a significant tightening of credit, with higher interest rates and stricter lending standards which act as a considerable hindrance for future growth. Citigroup economist Andrew Hollenhorst commented that Chairman Powell will need to observe several more months of softer inflation data prior to confidently signalling the conclusion of the hiking cycle. Similarly, Globaldata.TSLombard's chief US economist, Steven Blitz, warned against a "dovish hike" and the expectation of a soft landing, arguing that economies do not land, but that they are instead an ongoing process and a recession is more detrimental to the Federal Reserve than not. He further stated that should a recession be avoided, the inflationary moment will pass swiftly, rendering the confidence of the Fed to be at the end of the hiking cycle baseless.
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