By Andrew Moran
The Federal Reserve raised interest rates by another 0.75 percentage point on Wednesday during the July Federal Open Market Committee (FOMC) policy meeting.
The FOMC’s three-quarter-point hike lifted the benchmark fed funds rate to the range of 2.25–2.5 percent. It was a unanimous decision among central bank officials.
In addition, the Fed’s balance-sheet reduction efforts will continue, as expected, in September. The monthly run-off caps will rise to $35 billion for mortgage-backed securities and $60 billion for U.S. Treasuries.
While the labor market has remained strong, “recent indicators of spending and production have softened,” the FOMC said in a revised statement.
“Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.”
The institution is committed to lowering inflation to its 2 percent target. But the FOMC noted that it is quite concerned about broad-based inflationary threats.
Following the latest move, the fed funds rate futures forecast stands at 3.4 percent in December as more than 100 basis points of tightening is expected for the rest of 2022.
The leading benchmark stock market indexes held onto their gains Wednesday, with the Nasdaq Composite Index rallying 4.3 percent and the S&P 500 adding 2.9 percent.
Powell: US Not in a Recession
In his post-FOMC news conference, Fed Chair Jerome Powell stated that the economy is resilient and the central bank is acting quickly to fight “disappointing” inflation, noting that it is an essential task.
He warned that another exceptionally high rate hike could be appropriate, but it would depend on what the data is showing as officials search for evidence that inflation is coming down. Powell also revealed that the central bank could slow the pace of rate hikes.
Right now, according to Powell, the central bank has achieved its neutrality goal–a rate that neither spurs economic growth nor hinders an expansion. But he noted that the full effects of these large rate hikes have not been felt yet.
Powell purported that the Federal Reserve is not trying to initiate a recession, but the path to a soft landing has become narrower.
“We’re not trying to have a recession and we don’t think we have to,” he said. “We know the path has narrowed due to events outside of our control.”
When asked if the country is in the middle of an economic downturn, Powell rejected the suggestion that the United States is in a recession, alluding to “too many areas of the economy that are performing too well,” mainly the labor market.
Still, it can be challenging to predict the state of the economy in the next six to 12 months with any certainty, he added.
The Path of Interest Rates
After the June annual inflation rate climbed to 9.1 percent, it was anticipated that the U.S. central bank would turn ultra-hawkish and raise rates by a full point. This expectation dwindled in the days following the red-hot Consumer Price Index (CPI), with most overwhelmingly penciling in a 75-basis-point increase.
The next meeting of the Federal Reserve’s policy-making arm, the Federal Open Market Committee (FOMC), will take place in September. According to the CME FedWatch Tool, investors are anticipating a raise between 50 basis points (bps) and 75 bps. But much can happen until then, as plenty of key economic reports will come out, including two CPI and two job reports.
Looking ahead, some market analysts believe there will be a total of 125 basis points’ worth of rate hikes by the end of 2022.
“It’s clear that the Fed is not going to stop there. They’ve accepted that supply-side improvements will not come to their rescue to get inflation lower—hence, the dropping of the ‘transitory’ narrative—and they’ve recognized the onus is on them to hit the brakes on demand via higher interest rates,” wrote economists at the Dutch bank ING in a research note.
With investors pricing in the FOMC raising rates at each policy meeting for the rest of the year, experts are beginning to consider the Fed’s potential pivot next year. As economic slowdown fears intensify, economists believe the institution will begin easing monetary policy, beginning with a rate cut in the summer of 2023.
“Moreover, interest rates don’t stay high for long in the U.S.,” the bank added. “Over the past 50 years, the average period of time between the last Fed rate hike in a cycle and the first rate cut has only been six months. This suggests the door could be open to rate cuts as soon as next summer.”
In a recent note to clients, Scott Anderson, the chief economist at Bank of the West, thinks the Fed’s tightening campaign “will remain on auto-pilot” until the labor market weakens.
Is the Fed Beating Inflation?
A chorus of economists and strategists purport that inflation is showing signs of peaking, alluding to the sharp drop in energy prices. But while inflation could finally start to ease, it is unlikely to reach the Fed’s target of 2–3 percent anytime soon, says Jeff Klingelhofer, co-head of investment and portfolio manager at Thornburg Investment Management.
“Inflation continues to smolder, and the Fed is throwing as much cold water on it as they can to limit further economic damage,” Klingelhofer wrote in a note. “When inflation finally tumbles, it’s unlikely to fall to 2–3%. To the Fed’s chagrin, it will land in the 5–6% range.”
Renowned economist Mohamed El-Erian recently wrote on Twitter that food and energy prices will come down over the next three months, “but now that the drivers of inflation have been allowed to broaden, core inflation is likely to remain stubbornly high.”
Meanwhile, Robert Johnson, the chairman and CEO at Economic Index Associates, thinks that the Fed is beginning to tamp down rampant price inflation, as well as inflation expectations.
The University of Michigan’s one-year consumer inflation expectations dipped, to 5.2 percent, while the five-year outlook eased, to 2.8 percent.
“This Fed is very data-driven, so if we see significant signs of inflation weakening, the Fed would likely pause rate hikes and even consider easing rates. In fact, if you look out over a longer-term period, the market is expecting that interest-rate hikes will pause and could even decline,” Johnson told The Epoch Times.
A Looming Recession
Meanwhile, more economists believe the Fed’s inflation-busting initiative will manufacture a recession, a new poll found.
CNBC’s Fed survey revealed that 63 percent of economists, fund managers, and analysts think the central bank’s tightening efforts will trigger a recession, with 55 percent expecting a downturn in the next 12 months.
The survey found that fewer experts have confidence that Powell can navigate a soft landing.
“A path to a soft landing certainly exists, but it’s narrow, hidden, and very hard to find,″ wrote Roberto Perli, head of global policy research at Piper Sandler, in the survey. “In fact, some indicators suggest the U.S. economy may either already be in recession, or close to it.”
Jack Bouroudjian, the chairman of Global Smart Commodity Group, thinks the market is penciling in a recession based on the inversion of the yield curve (two- and 10-year). The spread has expanded to around -25 basis points.
“Surveys tell us that the economy is slowing down in all regions. The rate velocity of rate hikes to curb inflation has also cooled the housing market across the country,” Bouroudjian told The Epoch Times, adding that the employment picture remains strong.
The Bureau of Economic Analysis will publish the second-quarter GDP numbers on July 28. The market consensus is a growth rate of 0.5 percent, up from the -1.6 percent headline reading in the previous quarter.