Fed Raises Interest Rates to the Highest Level in More Than 22 Years

• The Federal Reserve has raised the benchmark borrowing rate to its highest in over 22 years.

• A quarter percentage point increase sets the federal funds rate to a target range of 5.25% to 5.5%, a level not seen since early 2001.

• Despite signals from policymakers in June suggesting two rate hikes were expected this year, market indicators suggest that no further increases might happen in the current year.

• Chairman Jerome Powell, speaking about the decision, emphasized that the central bank would take a data-driven approach and make decisions on a "meeting-by-meeting" basis.

There's been speculation among market watchers that the Federal Reserve might pause rate hikes to observe their impact on the economic climate. However, during a press conference, Powell indicated that future rate increases could occur if data supported such a decision while also leaving room for the possibility of holding rates steady at the next meeting in September.

The Fed's Chairman stated that the Open Market Committee would consider all incoming data and its economic activity and inflation implications. Post-meeting reactions from the markets were mixed, with some indices like the Dow Jones Industrial Average experiencing an uptick, while others like the S&P 500 and Nasdaq Composite saw little change.

Chief U.S. Economist at RSM, Joe Brusuelas, shared his view that it's time for the economy to adjust to the impact of the recent rate hikes. He suggested that the recent rate increase, inflation's steady pace, slower job creation, and modest growth have set conditions for the Federal Reserve to consider ending its rate hike campaign.

The Federal Reserve's post-meeting statement subtly hinted towards an approach considering additional information and its implications for monetary policy. This mirrors a data-dependent strategy central bank officials have widely adopted in recent public statements.

The rate hike received unanimous approval from voting committee members. It marks the 11th time the committee has increased rates since initiating a tightening process in March 2022.

This move affects consumer debt such as mortgages, credit cards, and personal loans, as the fed funds rate sets the rate for banks' overnight lending to each other. The Federal Reserve last implemented aggressive rate hikes in the early 1980s, during a period of high inflation and economic instability.

Inflation news lately has been positive, with the consumer price index seeing an increase of 3% on a 12-month basis in June, significantly lower than the 9.1% rate a year ago. The University of Michigan's recent sentiment survey suggests consumer optimism about price trends, predicting a 3.4% pace in the next year.

Despite these rate hikes, the economy has proven resilient with sustained growth. In Q2, GDP growth was at a 2.4% annualized rate. Predictions of a recession have not materialized so far, and job market performance has been commendable, with nonfarm payrolls expanding by nearly 1.7 million in 2023.

Alongside the rate hike, the committee plans to continue reducing its bond holdings, which peaked at $9 trillion before the commencement of quantitative tightening efforts. Currently, the balance sheet stands at $8.32 trillion as the Fed lets up to $95 billion a month in maturing bond proceeds roll off.

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