The Federal Reserve raised rates again by another historic amount in an aggressive attempt to bring down soaring inflation.Download PDF
- As expected, the Federal Open Market Committee (FOMC) increased the federal funds target rate range to 2.25% to 2.50%, a 0.75% increase.
- The FOMC has raised rates by 75 basis points at consecutive meetings, a first in modern Fed history.
- The Federal Reserve (Fed) reiterated its focus to control the largest breakout of inflation since the 1980s, as the committee removed COVID-related language in its statement and replaced it with, “The Committee is highly attentive to inflation risks.”
- The committee also included strong language in its statement that clearly reaffirmed the FOMC’s commitment to return inflation back to its 2% objective.
Following a rate hike of 0.75% in June, Federal Open Market Committee (FOMC) members at their July meeting agreed to hike the fed funds rate by another 0.75%, raising it to the 2.25% to 2.50% range, in an aggressive attempt to rein in inflation. The 75-basis-point hikes were the two largest interest-rate increases in almost three decades, and the back-to-back 0.75% increases was a first in modern Fed history.
The June CPI print appeared to force the hand of the FOMC to again increase its benchmark rate by a significant amount. Headline CPI was up 1.3% month-over-month in June, with energy contributing to nearly half of the increase. The trailing 12-month CPI print touched a 40-year high of 9.1%.
Recent labor market data has suggested that Fed tightening has been only modestly effective at addressing the supply-demand imbalance. In June, nonfarm payroll employment rose 372,000, which was in line with the average preceding three months of 383,000. While this appeared to put some investors’ minds at ease, there were still signs that the labor supply would continue to fall short of Fed projections, as the pace of workers returning to the labor force has been slow since February. With June’s labor force participation rate at 62.2%, which is still below the 63.4% reading prior to start of the pandemic, and with May job openings nearly twice the number of unemployed, this imbalance between supply and demand may prove to be a much larger task to tackle than anticipated.
Below are the language changes made in the Fed’s statement from June:
After the Fed announcement, the 10-year Treasury ended the day higher and finished at 2.78%; short and long rates were mixed for the day.
Markets closed in positive territory on the final day of the FOMC meeting, as both the Dow Jones Industrial Average and S&P 500 Index moved higher during Chair Jerome Powell’s press conference. The Dow and S&P 500finished the day up 1.37% and 2.62%, respectively. As the committee reiterated its stance on reigning in inflation more aggressively than in past meetings, Treasury yields across the curve finished the day mostly lower.
Investors were ready for the Fed to continue down its hawkish path, and the committee delivered on expectations with a 75-basis-point hike. Chair Powell said while a 1% hike was on the table, committee members felt that maintaining their current level of aggressive raises was appropriate. Chair Powell also left open the possibility that markets could see a similar increase in September, but the effects of the Fed’s rate-hiking cycle were still making their way through the economy, and their full impact has yet to be felt. Chair Powell also underscored that while transparency has been a prominent focus for the FOMC, future hikes would be decided on a meeting-by-meeting basis, giving the committee a bit more flexibility to make decisions without the market front-running its decisions. But for the time being, the move today appeared to soothe investor concerns, but we will have to wait and see whether the more hawkish path of the Fed will actually quell the flames of inflation or if the committee will have to pull back harder on the reins to slow inflation with additional hikes.
One basis point is equal to 0.01%.
The Dow Jones Industrial Average index (DJIA) tracks the share price of the top 30 large, publicly-owned U.S. companies which is often used as an indicator of the overall condition of the U.S. stock market.
Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.
Personal Consumption Expenditures (PCE) refers to a measure imputed household expenditures defined for a period of time.
The S&P 500 index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.
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