The Federal Reserve hiked the fed funds rate by 75bp to 2.25-2.50%, the second consecutive 75bp rate hike. The Fed rate decision was widely expected. With today’s rate hike, the fed funds rate is within the 2 to 3% range of estimates of the long-term “neutral” rate. However, as Chair Powell reminded us during his press conference, policy needs to go beyond neutral into restrictive territory this year in order to reduce inflation.
There were no meaningful changes to the July FOMC Statement. It retained its hawkish tone but it acknowledged signs of slowing economic activity. The most important takeaway is the FOMC believes, “ongoing increases in the target range will be appropriate”. This strongly suggests the Fed will continue to hike greater than 25bp at the September meeting where we expect the decision to be between 50 and 75bp.
- There was a mild downgrade in the growth outlook with the FOMC Statement pointing to slowing consumer and business spending.
- Interestingly, despite the deterioration in the jobless claims data, they maintained the labour market remains robust.
- There was a small tweak to the inflation part of the statement adding food to higher energy prices.
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