US Fed Hikes Rates By 25 Bps To 22-Year High; Jerome Powell On Rate Cut, Inflation

The US Federal Reserve in line with the expectations has raised the target range for the federal funds rate by 25 basis points to 5-1/4 to 5-1/2 percent. With that, the key rates of the US is at their highest level since 2001. Chair Jerome Powell in his policy speech hinted that inflation is stubbornly above the Fed's target of 2% and there is a long way for it to calm down. This does stir expectations of further rate hikes in upcoming policies, however, experts believe that July 2023 policy hike would be the last of the cycle.

Fed seeks to achieve maximum employment and inflation at the rate of 2 per cent over the longer run.

In its FOMC statement, the Fed said, "the Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 per cent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

Also, the committee will continue reducing its holdings of Treasury securities agency debt and agency mortgage-backed securities, as described in its previously announced plans.

Hence, it reiterated that the committee is strongly committed to returning inflation to its 2 per cent objective.

According to the Fed, the recent indicators suggest that economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Adding it said, "Inflation remains elevated."

During the press conference, Powell dismissed the rate cut possibility scenario in the current year. For next year, he hinted that rate cuts will depend upon how confident they are.

Reacting to the Fed policy, Subho Moulik, CEO, Appreciate, a fintech platform for savings and investments said, "After ten consecutive rate hikes and a pause in June, the Federal Reserve has now hiked rates again by 25 bps. As a result, the federal funds rate is now at its highest level in 22 years. But it looks like the economy is going to be okay. The US economy has been resilient despite high inflation and tightening monetary policy. The unemployment rate is near record lows in half of US states, and consumer confidence is at a two-year high. Moreover, stocks have been doing surprisingly well, with Wall Street defying the pressures of what has been the fastest hiking cycle in about 40 years."

He added, "Given these encouraging factors, economists now think a soft landing is more likely than the alternatives, which is one of the reasons the Fed doesn't seem too worried about pushing rates up. Although inflation is gradually cooling, it still remains far above the Fed's 2% target. The latest data indicates that the Personal Consumption Expenditure (PCE) Price Index, the Fed's preferred inflation gauge, increased 4.6% on a year-over-year basis in May, down from 4.7% in April - the May increase was the lowest since October 2021."

"The Fed's rate hike, however, will force central banks around the world to also bump up interest rates to avoid currency depreciation risk, as the flow of capital to higher-yielding US assets might weaken their currencies," Moulik further said.

In regards to the US banking system, Fed said, it "is sound and resilient.". Further, the Fed added, "Righter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain."

However, the Committee remains highly attentive to inflation risks.

For assessing the appropriate stance of monetary policy, the Fed will continue to monitor the implications of incoming information for the economic outlook.

It added, "The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals."

FOMC's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were --- Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller.

On further rate hikes, Raghvendra Nath, Managing Director, Ladderup Wealth Management said, "Markets had already anticipated this decision. The FED chief has indicated that further actions would be dependent on various reports expected before the next FED meeting. The key events to look out for in the market and FED would be two job reports and two reports on consumer price inflation. Swap market pricing indicates a 50% probability of another rate hike before the FED's tightening cycle ends. A sustained easing in price pressures over the coming months would be necessary for the FED to put a stop to this tightening."

Meanwhile, Dr V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, "The US markets didn't react to the expected rate action and message from the Fed. The message from the Fed chief's press conference is that further rate actions will be data-dependent. So the markets will be keenly watching the jobs report and CPI numbers due before the September Fed meeting. As of now, there are no known negative triggers that can impact global equity markets."

Highlighting about rate hike impact on markets, Jayden Ong, Senior Market Analyst, APAC, Vantage said, "The last three rate revisions didn't impact the Indian markets, especially Nifty, but this rate hike might create a longing for safe-haven products. In the short term, Interest rate hikes will cause a tight liquidity situation. But, keeping in mind the Indian economy's robustness and demographic benefits, no major impact will be seen on foreign investment in India."

Ong added, "At present, the US economic system is beginning to balance, and the Federal Reserve continues to adjust the overall economic system, and it is expected that risk assets will continue to be boosted. Therefore, expect the stock indexes (SP500, DJ30, NASDAQ) will continue to go higher."

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