US Fed meet outcome: Key takeaways from Fed decision

The latest quarter percentage-point rise, which was in line with analysts’ expectations, is the Fed’s 11th hike in its last 12 meetings, since it began an aggressive campaign of monetary tightening last year in response to rising prices. The rate-setting Federal Open Market Committee (FOMC) used similar language when it voted to hold rates steady in June, and the latest statement suggests that policymakers are mulling another pause at their next meeting in September. 

‘’The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 per cent objective,” said FOMC in its statement on July 26.

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Here are key takeaways from the FOMC July meet outcome:

US Inflation

FOMC members voted unanimously to hike the key lending rates in the range of 5.25 per cent – 5.50 per cent, in order to quell inflation in the world’s biggest economy. US inflation remains “well above” the central bank’s target of two per cent, said Federal Reserve Chair Jerome Powell in a post-policy press conference, adding that it will take time to bring price increases back down.

The FOMC added in its statement that in determining the extent of additional policy firming that may be appropriate to return inflation to 2 per cent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

US consumer prices rose modestly in June and registered their smallest annual increase in more than two years as inflation subsided further in US, however, policymakers had expressed concern about core inflation, excluding food and energy, which has been slower to come down.

More rate hikes ahead

Fed Chair Powell added that it is possible the central bank will follow its latest rate rise with another one at the policy meeting scheduled for September. “It is certainly possible we would raise the funds rate at the September meeting if the data warranted, and I would also say it’s possible that we would choose to hold steady at that meeting” if that’s what the data called for.”

He highlighted that the Fed will be making decision on monetary policy on a meeting-by-meeting basis. Powell noted that a wide range of data would be considered by the Fed as it deliberates on monetary policy.

But he added “it’s not an environment where we want to provide a lot of forward guidance” about future rate actions, and whether the Fed hikes again will be determined by where the data stands at the time of future policy gatherings.

US economy

Powell highlighted that Fed staff are no longer forecasting a US recession, and said that “we do have a shot” for inflation to return to target without high levels of job losses. ‘’There was a lot left to go” to see such a soft landing, said the Fed Chair during the press conference.

“So the staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession,” he said.

Powell added he doesn’t expect the US central bank to lower interest rates this year and still expects the economy will come back into better balance without major damage.

“We’ll be comfortable cutting rates when we’re comfortable cutting rates, and that won’t be this year. My base case is we’ll be able to achieve inflation moving back down to our target without the kind of really significant downturn that results in high levels of job losses,” Powell said, but added that path is “a long way from assured.”

Job gains remain “robust,” the Fed said, while it described the economy as growing at a “moderate” pace, a slight upgrade from the “modest” pace seen as of the June meeting. For 2023, the median estimate for US gross domestic product (GDP) growth was marked up to 1 per cent from 0.4 per cent in March by policymakers.

US Markets post-FOMC decision

Bond yields dropped, with the two-year US yields, sensitive to imminent Fed moves, falling to 4.84%. US equities rallied during the press conference before reversing gains with the S&P 500 and the tech-heavy Nasdaq 100 resuming losses.

Since early last year, the US central bank has engaged in the most aggressive tightening campaign since the 1980s in an effort to curb inflation, which in 2022 hit a 40-year high. While policymakers paused rate hikes last month to assess the impact of previous moves, they also signaled at the time that two more increases would probably be appropriate by the end of the year. The FOMC next meets on September 19-20 and subsequently on October 31-November 1.

Updated: 26 Jul 2023, 11:58 PM IST