The U.S. Federal Reserve delivered its second consecutive rate hike of 75 basis points (bps) this week, as the fight against inflation remains its primary focus. With the federal funds rate range now set at 2.25% to 2.5%, matching its peak from the last hiking cycle and in line with the central bank’s long-term estimated neutral rate, the question becomes how much further the Fed will go.
Fed Chair Jerome Powell has signaled that the central bank will keep moving aggressively as long as inflation continues rising. However, it remains to be seen how the Fed would react if growth slows more meaningfully. Coming into the July 27 meeting, markets were pricing in a terminal rate (the point at which the Fed stops hiking) of around 3.5% and multiple rate cuts in 2023. Equity markets were boosted early Wednesday, after encouraging earnings reports from Microsoft and Alphabet, and remained strong following Powell’s press conference as he opened the door to slowing the pace of the hiking cycle.
“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,” Powell said. “At some point, it will be appropriate to slow down. … We've been front-end loading these very large rate increases, and now we're getting closer to where we need to be.”
Below, we provide perspectives from U.S. economist Jared Franz, and fixed income investment directors David Bradin and Margaret Steinbach.
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