The Board of Governors of the Federal Reserve is expected the meet next week on July 25-26 to discuss the macroeconomic conditions of the U.S. economy. Last month, it was massively anticipated that the American central bank would pause interest rates after ten consecutive times.
The Federal Reserve paused interest rate hikes in June 2023 for a few reasons. First, inflation had been coming down from its peak in December 2022. The Consumer Price Index (CPI) rose 3.0% in June 2023, down from 4.0% in May 2023. Core inflation, which excludes food and energy prices, rose 5.0% in June 2023, up from 4.6% in May 2023.
Inflation Rate Since July 2022
Source: U.S. Bureau of Labor Statistics
The latest inflation data release shows that inflation decreased to 3% from 8.5% in July 2022. This 3% is one percentage point higher than the Federal Reserve’s nominal 2% target. The Federal Reserve is widely expected to raise interest rates by 25 basis points at its July meeting. This would be the central bank’s 11th consecutive rate hike, and would bring the target range for the federal funds rate to 5.25%-5.50%.
Inflation is still running high, although it has come down from its peak in December. Moreover, The unemployment rate is at a 50-year low, and job growth has been robust. The economy grew at an annual rate of 6.9% in the first quarter, and is expected to grow at a healthy pace in the second quarter.
What’s interesting, however, is that most economists now expect the anticipated July hike to be the last one. This means that they believe that the July rate hike will bring inflation down to its 2% nominal target. If inflation hits its 2% target, then there will be no need to hike more.
According to The Straits Times, a survey of 45 economists was conducted from July 13 to July 18. And the economists surveyed expect the Fed to keep rates at their peak level through the end of the year. They are split on whether the first cut will come in January 2024, with more than one-quarter seeing a reduction. The median group sees the first cut in March, with rates falling to 4.75% by June 2024 and ending 2024 at 4.25%.
By contrast, Fed officials in June forecast rates falling more gradually to a range of 4.5% to 4.75% by the end of 2024. Markets are pricing in the near certainty of a July hike, with the first quarter-point cut coming by March and rates plunging to 3.9% by the end of 2024.
While it is not certain yet that the July rate hike might be the last one, there is a strong possibility. The Fed has said that it wants to see more evidence that inflation is on a sustained downward trend before raising rates again. If inflation continues to come down in the coming months, the Fed may decide to pause rate hikes or even start to cut rates.
One sure thing is that this July meeting will mark a turning point in where the Fed will be heading. Ultimately, the decision of whether or not to raise rates in July will depend on the state of the economy and inflation. The Fed will continue to monitor these factors closely and will adjust its policy accordingly.