Fed Raises Rates to 22-Year High, But Are They Done?
July 25, 2023
After giving the economy a brief pause last month, the Federal Reserve resumed raising interest rates this week with a quarter-percentage-point increase that brings them to the highest level in 22 years.
The 11 members of the Fed’s Federal Open Markets Committee (FOMC) voted unanimously to increase the benchmark federal funds rate to a range between 5.25% and 5.5%. This marks the 11th increase since March 2022, when they began raising rates from essentially zero.
Fed Chair Jerome Powell said it was too soon to tell whether the hike would be the last in a series of increases that aimed to bring down inflation by cooling the economy. The central bank will make its determination about future rate hikes based on how the economy fares in the months ahead, “with a particular focus on making progress on inflation,” Powell said at a news conference following the meeting.
Inflation cooled last month to the slowest pace in more than 2 years. The consumer price index (CPI) climbed just 3% in June from a year earlier, down substantially from the 9.1% annual increase in June 2022, a 44-year high. However, economists focus more on the “core” CPI, which excludes volatile components like food and energy, to get a better sense of inflationary pressures. On a month-to-month basis, core inflation saw its smallest gain in two years, but on an annual basis, core inflation was still up 4.8% in June.
The labor market will likely be the determining factor for the Fed. Many economists worry that wage growth remains too strong and the tight labor market will continue to drive core inflation higher next year. Others have noted that there has been evidence of the labor market cooling, which would take the pressure off inflation. The amount of time it is taking unemployed workers to find new work has been increasing. The number of hours worked by private-sector employees has slowed, as has monthly hiring.
The FOMC meets again in September, and officials seem split about whether there will be an additional increase at that meeting or a more prolonged pause until November or December, giving the Fed’s rate increases more time to take full effect before deciding if another increase is necessary.