Federal Reserve Bank Futures Rate Hikes to Curb Inflation

Trading News - Federal Reserve Bank Chairman Jerome Powell indicated a strong likelihood of additional interest rate hikes in the coming months to curb inflation. This signal comes after the central bank decided to hold its policy rate steady at 5.0%-5.25% at its most recent meeting, following a series of aggressive rate increases in a 14-month span amounting to a 500 basis point boost.

Marking a pause in its tightening cycle, the Federal Reserve had left rates unchanged last week, allowing the central bank to study the implications of its earlier actions. Market participants have assigned a 79.4% probability to a 25 basis point rate hike at the next meeting on July 25-26, according to the CME FedWatch tool. This potential move would raise the federal funds rate target range to 5.25%-5.50%.

In recent times, the Federal Open Market Committee (FOMC), the rate-setting body within the Federal Reserve, has embarked on a historically aggressive campaign to tame the highest inflation in four decades. The effectiveness of this campaign is reflected in the market, albeit consumer prices still exceed the Fed's 2% objective.

The confirmation hearing of three Federal Reserve nominees before the Senate Banking Committee shed further light on the central bank's perspective. The nominees – Fed Governor Philip Jefferson, chosen to become vice chair, Fed Governor Lisa Cook, reappointed for a new term, and labor economist Adriana Kugler, proposed to fill an open seat left by Lael Brainard – unanimously committed to prioritizing the reduction of inflation to the central bank's 2% target if they were to be confirmed.

Federal Reserve Rate Hike History
Interest rates reached the highest point in modern history in 1981, when the annual average reached 16.63%. The decade concluded with fixed interest rates hovering around 10%. The 1980s were a costly decade for borrowing money.


When Is The Next Fed Interest Rate Decision 

Jul 26, 2023
Sep 20, 2023
Nov 01, 2023
Dec 13, 2023

Powell's testimony to Congress not only reiterated these sentiments but also touched upon the state of the banking sector. Despite a spate of bank failures in March, including Silicon Valley Bank, Powell underscored the U.S. banking system's resilience. He asserted the central bank's commitment to reviewing and fortifying supervisory practices for larger banks to maintain a robust banking system.

The Chairman also noted that inflation remains elevated, even though it has slowed since the middle of the previous year. He indicated an improvement in the labor market balance, as seen in the rising labor force participation, slower wage growth, and reduced job vacancies. Nevertheless, labor demand substantially overshadows the available supply of workers, despite a narrowing jobs-to-workers gap.

Fed Rate Hike 2023
0.5 Percentage Point Through 2023's End

Powell's remarks emphasized that the process of returning inflation to the 2% target remains far from complete. He noted that the full impact of monetary restraint, particularly on inflation, would become apparent over time. The Fed plans to approach interest rate decisions on a meeting-by-meeting basis, guided by incoming data and their implications. Powell hinted at a moderated pace of rate hikes going forward, allowing the economy more room to adapt and improving the central bank's decision-making process. Despite holding off on a rate increase at the last meeting, the Fed raised its interest rate forecasts for the year, suggesting rates could potentially reach as high as 5.6%.

In conclusion, Powell's testimonies reveal an ongoing, proactive effort from the Federal Reserve Bank to normalize monetary policy conditions. As inflation rate continues to run high, the central bank is ready to slow economic growth and soften labor market conditions, if necessary, to bring inflation back to its target. Despite the pause in rate hikes last week, the Federal Reserve maintains its readiness to implement additional increases based on incoming economic data, alluding to potential hikes as soon as next month.