Yahoo Finance What Will It Take for the Federal Reserve To Stop Hiking Interest Rates?
As was expected, the Federal Reserve — following a short breather with a pause last month and after 10 consecutive rate hikes — increased its rates for the 11th time since March 2022 after its most recent two-day Federal Open Market Committee (FOMC) meeting.
I’m a Self-Made Millionaire: These Are the 6 Investments Everyone Should Make During an Economic Downturn
Find: 9 Safe Investments With the Highest Returns
In a unanimous decision, the Fed raised interest rates by 25 basis points, taking the benchmark borrowing costs to their highest level in more than 22 years.
Now, the question remains whether this will be the last hike of the cycle — and whether economic data will be sufficiently positive for officials to do so.
Experts Weigh In
According to Jeffrey Rosenkranz — portfolio manager, Shelton Capital — the Fed cannot afford to act on a hunch. The Fed might balance the risks of easing up too soon (which could allow inflation to smolder and then re-ignite) versus overcorrecting and staying tighter for too long, which would push the economy into a harder landing and more pronounced slowdown.
“They know how to run the playbook on stimulating an economy out of a recession — ease rates and animal spirits will take care of the rest. Conversely, trying to stomp-out entrenched inflation is a much trickier and more uncertain process. Therefore, the Fed will need to see clear and convincing evidence that the inflation trend is well under control,” he added.
Inflation Data Somewhat Reassuring
This new hike came despite consumer inflation continuing its steady — and encouraging — decrease in June, standing at 3%, according to the consumer price index (CPI). This represents a notable decrease since May’s 4.9% figure and a huge decrease since the 9.1% of last June, according to BLS data.
Yet, that figure has a bit further to go to reach the Fed’s 2% target, something Chair Jerome Powell has been reiterating.
Powell, at the Fed’s post-meeting press conference, noted that there would be two additional CPI reports to look at before the next rate decision in September.
“I would say it is certainly possible that we would raise funds again at the September meeting if the data warranted and I would also say it’s possible that we would choose to hold steady at that meeting,” he said, according to a transcript of his remarks. Powell added that while the June CPI report was welcome, “it’s only one report, one month’s data.”
“We hope that inflation will follow a lower path as was — that it would be consistent with the CPI reading but we don’t know that and we’re just going to need to see more data,” he said.
Several experts agreed, saying that the direction of rates will depend on where inflation goes — and how fast it will move.
“The Fed will need to see another couple cool inflation reports for the Fed to be done raising rates,” said Edward Moya, senior market analyst (The Americas, OANDA). “The U.S. economy is going to enter slowdown mode in the next quarter as banking defaults rise and as private credit markets get rattled. There is a good chance that September will be a skip and that we might see enough economic weakness that allows them to hold off raising in November.”
Other experts also noted the tone of the Fed’s statement, which was more “neutral” than previous ones. Previous declarations were rather “decidedly dovish or hawkish,” according to Quincy Krosby, chief global strategist for LPL Financial.
“Still, it’s clear that the Fed will raise rates again if the core rate of inflation doesn’t edge lower at a faster pace even if the ‘stickiness’ has begun to untangle,” said Krosby.
Fed Set on Tamping Down Inflation
Other experts echoed the above sentiment — including Bill Adams, chief economist for Comerica Bank, who said rates have likely peaked for this cycle.
“With the unemployment rate near a half-century low, the Fed sees its main job as getting inflation back to target,” said Adams. He added that one area where inflationary pressures are still pronounced is wage growth.
“Average hourly earnings rose 4.4% on the year in June, well above the 3% rate they averaged in the last few years before the pandemic, when the labor market was strong but inflation was also well behaved,” he said.
Yet, Adams added that if inflation holds on the slower trajectory it has charted over the last few months — and wage growth slows in the second half of 2023 — the Fed will likely take a pass on raising rates again in the second half of 2023.
“The odds of this seem pretty good, and Comerica thinks the Fed is more likely to hold rates steady for the next several decisions than to make more hikes,” he said. He noted, however, that “it’s not a slam dunk.”
“Crude oil prices have ticked up in the last few weeks, an upside risk to inflation, and house prices rose more than expected in April and May,” he said. “If wage growth or inflation surprises to the upside in the second half of 2023, the Fed could make one more rate hike before the end of this year.”
After skipping a hike in June, the most recent hike likely presages another skip at the next meeting in September, teeing up November as the next Fed decision where a hike would be seriously considered, per Adams.
Also: 3 Things You Must Do When Your Savings Reach $50,000
Some Analysts Say Another Rate Hike Very Likely
William Luther — director of the Sound Money Project, American Institute for Economic Research — went a step further, saying that since Fed officials have projected rates will rise another 25 basis points this year, the evidence would have to be very convincing to get them to stop short of that.
“They would need to believe that they have done too much already — and that seems unlikely,” he said.
“Part of the reason Fed officials feel so emboldened to keep raising rates is that — at least so far — their rate hikes have not had much of an effect on the real economy, ” he said. “Real GDP growth was very strong in Q1, prompting Fed officials to revise their projections to 1% from 0.5% for 2023. Likewise, the unemployment rate remains very low — just 3.6% in June. Absent forecasts of negative real GDP growth in Q3 or Q4 or unemployment in excess of 4%, I think another rate hike is likely this year.”
More From GOBankingRates
5 Cities Becoming Popular With Baby Boomers: Are They Right for Your Retirement Years?
The 4 Types of Bank Accounts All Small Businesses Should Have
This article originally appeared on GOBankingRates.com: What Will It Take for the Federal Reserve To Stop Hiking Interest Rates?
