On Wednesday, local time, the US Federal Reserve announced it had raised interest rates by 75 basis points (bps), taking the target range to 2.25 to 2.50 per cent.
In a statement, the Federal Open Market Committee (FOMC) reiterated that it was “strongly committed” to returning inflation to its 2 per cent objective after the US consumer price index (CPI) soared to a 40-year high of 9.1 per cent in June.
“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” it said.
While acknowledging that recent indicators of spending and production had softened, the FOMC stated that labour market indicators had remained robust in recent months.
This strength was also cited by Fed chairman Jerome Powell as underlying his view that despite recent fears, a recession is not currently underway in the world’s largest economy.
“I do not think the US is currently in a recession, and the reason is there are just too many areas of the economy that are performing too well,” he told reporters at a press conference.
Mr Powell pointed to a number of signs including growth in payroll jobs, the unemployment rate and wage measures tracked by the Fed as being indicative of “a very strong labour market”.
“It doesn’t make sense that the economy would be in recession with this kind of thing happening,” he said.
The FOMC said that it would continue to monitor the implications of incoming information for the economic outlook, with ongoing interest rate increases anticipated as being appropriate.
“The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals,” it added.
“The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
Having now delivered two 75-bp hikes in a row, Mr Powell flagged that additional large moves could come from the Fed in the future, including when it next meets in September.
“While another unusually large increase could be appropriate at our next meeting, that is a decision that will depend on the data we get between now and then,” he said.
“We will continue to make our decisions meeting by meeting, and communicate our thinking as clearly as possible.”
Commenting on the latest rate decision, Westpac senior economist Elliot Clarke said that the most likely course for the Fed moving forward would be a 50-bp increase at its September meeting followed by two 25-bp increases in November and December.
“It is obvious that inflation is currently far too high and, as yet, unclear whether the pulse is sustainably decelerating,” said Mr Clarke.
“However, Chair Powell was crystal clear in the press conference that policy acts with a lag, believing that ‘significant further tightening’ is in the pipeline.”
Meanwhile, Commonwealth Bank chief economist and head of global economic & markets research Stephen Halmarick argued that future hikes by the Fed could bring on a recession.
“We now expect to see the FOMC increase the Fed Funds target rate to 3.75 to 4.0 per cent by year-end 2022, which would include 50-bp rate hikes in September, November and December,” he said.
“This is expected to see inflation decline in 2023, but also lead to recession. We expect a monetary policy easing cycle to get underway in September 2023, taking the Fed Funds target rate to the Fed’s estimate of neutral around 2.5 per cent in 2024.”
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.