After a brief pause in its interest rate hike campaign, the Federal Reserve decided to raise rates by a quarter of a percentage point on Wednesday. This widely expected move brings the Federal Funds Rate to a 22-year high. The question now is whether this increase might be the last. Based on remarks by Chairman Powell after the announcement, the answer is probably not.
Despite the drop in inflation in June, Powell acknowledged that inflation has proven more resilient than expected and said the Fed might make further rate decisions based on the Consumer Price Index, unemployment rate, and other data.
While there might be a few more data points to consider in the eight weeks before the Fed’s next meeting, Powell made it clear that another hike is on the table in September. He reiterated, "We are strongly committed to bringing inflation back to our 2% goal."
The Fed is walking a fine line between its dual mandates of price stability and maximum sustainable employment. By raising rates to continue cooling inflation, the concern is that it may overshoot and push the economy into a recession that would cause higher unemployment.
The Majority of Economists Changed Their Minds and Now Think a Recession Is Unlikely
The opinion that the Fed might get it right and orchestrate a “soft landing,” where inflation comes down to acceptable levels without triggering a recession, is picking up steam. Many top economists have reversed their forecasts and now think the Fed might be able to pull it off.
According to a survey by the National Association for Business Economics, a 71% majority of economists put the odds of a recession in the next 12 months at 50% or less. That includes one-fourth who say a recession has a probability of 25% or less. This is a big change from where this group was back in April when a majority were predicting a recession.1
Whether this is the last rate hike for the cycle or there are a few more spread out over the rest of the remainder of the year, all indications point to us being close to peak interest rates.
And as we have said previously, when the Fed does stop hiking rates, equities tend to perform well. In fact, the median returns of the S&P 500 for the 3-, 12- and 30-months post-pause were +7.7%, +19.1%, and +62%, respectively.2,3 Of course, we all know that past performance is no guarantee of future results.
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- BusinessInsider.com, July 25, 2023
- Bloomberg.com, June 18, 2023
- FoxBusiness.com, June 14, 2023