US Fed raised its lending rate to highest level to tackle Inflation

US Federal Reserve implements highest benchmark rate since 2001 in response to inflation surge, signals more increases possible. Furthermore, they stressed their commitment to ongoing evaluation of additional information and its potential impact on monetary policy moving forward.

Image Credit: Shutterstock

On Wednesday, the US Federal Reserve implemented its highest benchmark lending rate since 2001 in response to above-target inflation. Additionally, they hinted at the likelihood of further rate increases in the future. The quarter-percentage-point raise brings the overnight interest rate to a range of 5.25 per cent to 5.5 per cent, according to the US Central Bank. They also emphasized that they will continuously evaluate additional information and its potential impact on monetary policy going forward.

The most recent quarter-percentage-point increase, which matched analysts’ predictions, marks the Federal Reserve’s 11th rate hike in the past 12 meetings. This aggressive monetary tightening campaign began last year as a response to the escalating inflation. In June, the rate-setting Federal Open Market Committee (FOMC) used comparable language when it decided to maintain rates at the current level. The latest statement indicates that policymakers are considering another pause in their rate adjustments at the upcoming meeting in September.

“In its statement on July 26, the FOMC declared its ongoing commitment to reducing its holdings of Treasury securities, agency debt, and agency mortgage-backed securities as per its previously disclosed plans. Furthermore, the Committee expressed a strong dedication to restoring inflation to its 2 per cent objective.”

Key takeaways from the FOMC July meet outcome include:

US Inflation: FOMC members voted unanimously to raise key lending rates to 5.25 percent – 5.50 per cent, aiming to curb inflation in the US. Federal Reserve Chair Jerome Powell acknowledged that US inflation remains “well above” the 2 percent target and will take time to address. The FOMC stated they will consider various factors to decide on additional policy tightening to return inflation to 2 percent over time, including cumulative monetary policy tightening, lags in its effects on economic activity and inflation, and economic and financial developments.

More rate hikes in the future: Fed Chair Powell stated the possibility of another rate increase at the upcoming September policy meeting. He emphasized that decisions on monetary policy will be made on a meeting-by-meeting basis, taking into account a wide range of data to determine the appropriate course of action. Powell mentioned that the Fed may choose to raise rates or hold steady based on the data’s indications.

US Economy: Powell emphasized that the Fed staff no longer predicts a US recession and believes there is a chance for inflation to return to target without significant job losses. Despite the positive outlook, he cautioned that achieving such a soft landing would require further progress, as the forecast indicates a noticeable slowdown in growth later this year. The recent economic resilience has contributed to the more optimistic stance of the Fed’s staff.