Federal Reserve sends US interest rates to 22 year high in possible final hike

The US Federal Reserve today launched what many on Wall Street think will be the final interest rate hike in its current tightening cycle.

Members of the federal open market committee (FOMC) backed a 25 basis point increase to leave the federal funds rate at a range of 5.25 per cent and 5.5 per cent.

It means the world’s most important interest rate now stands at its steepest level in 22 years. The vote was unanimously in favour of the rise.

Wall Street’s S&P 500 was broadly unchanged on the news, down 0.16 per cent. Treasury yields barely budged. The dollar was flat.

It also marks a return to tightening after the Fed paused raising borrowing costs at its last meeting in June. Fed chair Jerome Powell and co wanted to wait for the effects of its previous rises to filter through the economy to judge whether more increases were necessary. 

US inflation has fallen sharply from its peak of just over nine per cent this time last year to three per cent, close to the Fed’s two per cent target.

That has dialled back pressure on the central bank to dose the US economy with aggressive rate rises and opened the door to the Fed to stop bumping up rates.

At last month’s meeting, chair Jerome Powell said the FOMC was minded to tread carefully to avoid piling unnecessary pain on households and businesses.

Fed officials have already lifted rates at every meeting except one since March 2022, including several unusually large 75 basis point increases.

Now the world’s most influential central bank is trying to set policy to the right frequency to ensure both inflation comes back to the two per cent target and the economy dodges a recession, known as a “soft landing”.

The Fed carried over the wait-and-see sentiment in its policy statement today.

“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook,” the FOMC said.

FOMC officials said they will continue to consider “the lags with which monetary policy affects economic activity and inflation” when making future rate decisions.

There is a chance the Fed will be lured into further rate rises if the economy smokes expectations. Powell said they may tighten again at the next meeting in September if the data warranted.

He also said another skip is possible. Two sets of inflation numbers are due before the next decision.

“We suspect that further signs of a significant easing in the monthly core CPI numbers for July and August will ultimately persuade the Fed to hold fire… as that disinflation gathers pace,” Paul Ashworth, chief north America economist at Capital Economics, said.

“We think the data will tell the Fed not to hike again,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said.

US employers are still keen to hire workers and consumers are willing to spend, reflecting the underlying strength of the world’s largest economy.

An additional 209,000 jobs were created in America last month, although that was below Wall Street’s expectations and the smallest gain in two and a half years. Wages though jumped 4.4 per cent, inconsistent with the Fed’s inflation target. Core inflation is still high at nearly five per cent.

Purchasing managers indexes this week showed US private sector growth cooled for the sixth month in a row.

Output is already buckling under the weight of the Fed’s previous rate rises, though a momentary jump in future activity would raise the chances of Powell and co resuming rate rises.

In the June “dot plot,” an amalgamation of Fed officials’ rate expectations, borrowing costs were projected to hit 5.6 per cent by the end of this year.

Experts are split over whether the world’s largest economy will slip into recession. The US’s yield curve has been inverted for some time, often a precursor to a recession.

US rate cuts aren’t expected until at least early next year.