The Federal Reserve Open Market Committee (FOMC) lifted the federal funds rate to the 2.25% to 2.50% range and will continue its balance sheet runoff.
The Fed updated its language to reflect recent economic data, stating that “indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low.”
On rising prices, the statement noted that “inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”
All of the members of the FOMC voted in favor of the decision.
Key Implications
The Fed met market expectations with a unanimous 75 basis-point hike, contrary to the prior meeting where there was one dissention in favor of 50 basis points. Clearly developments on the inflation slide left little doubt this time around. With all members onside to keep tightening the screws on demand, expectations are for continued rate hikes as the Fed aggressively attempts to bring down inflation.
Market pricing is looking for another 50 basis-point hike in September and has the policy rate reaching to upwards of 3.5% by year-end. With this policy path and the rising risk of recession in the U.S., the yield curve is moving even further into negative territory. Chair Powell is on deck to speak. He will have to walk a fine line as he justifies the Fed’s actions against the growing downside risks.
