The Fed Raises Rates (Again)…Now What?

As expected, after the conclusion of the July Federal Reserve Open Market Committee two-day meeting, the Fed announced that they would raise interest rates by three-quarters of a percentage point for the second straight meeting.  This will bring their benchmark rate to a range between 2.25% and 2.5%.

Fed Blog Image

Big Picture

The 75-basis-point moves in June and July were substantial rate increases and part of a campaign meant to slow the economy and get inflation under control.  In a policy statement released after the meeting, officials acknowledged signs of slower economic activity since they met and raised rates last month. However, Chair Jerome Powell has made clear he does not believe the U.S. is in a recession, citing ongoing strength in the labor market. He isn't ready to relent on rate increases until actual month-to-month inflation has fallen and stays low.

Why it matters

In general, rate increases tend to slow the economy and cool inflationary pressures by raising borrowing costs, which restrains investment, hiring, and spending. However, higher rates cant fix supply-chain bottlenecks or increase oil production or refining capacity, and more expensive borrowing threatens to worsen some of those constraints by deterring new investment.

Bottom Line

Given the ambiguity in recent economic data, the Chairman indicated that the Fed would let the data determine what happens next. While he shared an expectation for more rate increases later this year, he acknowledged that further surprises could be in store, and nothing is set in stone.  Like the rest of us, he will just have to wait and see what developments tomorrow holds.

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