The Federal Reserve Open Market Committee voted to raise the federal funds target rate for the 11th time since March 2022 to a target range of 5.25% to 5.5%, the highest level since 2001. The latest 25-basis-point rate hike by the Federal Reserve follows the decision to pause activity in June.
“The decision to raise rates again is based on the fact that the economy is still a bit stronger than the Fed would like to see,” says Zonda chief economist Ali Wolf. “In fact, Chair [Jerome] Powell said that the current policy hasn’t been ‘restrictive enough for long enough.’”
In a news release announcing the rate increase, the Federal Reserve said economic activity “has been expanding at a moderate pace” as job gains remain robust and unemployment has remained low. Wolf says the key indicator that likely influenced the Federal Reserve’s decision to increase rates is inflation.
Year over year, inflation in June was 3%, a significant improvement from a peak of 9.1% in June 2022; however, it is still elevated above the Federal Reserve’s long-term target of 2%.
“While headline inflation has cooled notably, core inflation—price increases minus food and energy—is still elevated,” says Wolf. “The Federal Reserve likely has some scars from the 1970s where they thought they had gotten inflation under control for it to just return with a vengeance. Until we see a more notable cooling in core inflation, the chances of the Fed raising short-term interest rates again this year is still on the table.”
The Federal Reserve noted that tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation in the coming months. While the extent of these effects remains uncertain, the Federal Reserve Open Market Committee “remains highly attentive to inflation risks” and remains “strongly committed to returning inflation to its 2% objective.” The Federal Reserve said it would be prepared to adjust the stance of its monetary policy “as appropriate” if risks emerge that could impede the attainment of its goals.
