The U.S. Federal Reserve raised a key interest rate by a quarter of a percentage point on Wednesday, citing still-elevated inflation as a rationale for what is now the highest U.S. central bank policy rate since 2007.

The hike, the Fed’s 11th in its last 12 meetings, set the federal funds rate – the benchmark rate on overnight loans that banks charge each other – in the 5.25%-5.50% range. That level was last seen just prior to the 2007 housing market crash, and it has not been consistently exceeded on an effective basis for about 22 years.

“The [Federal Open Market] Committee will continue to assess additional information and its implications for monetary policy,” the Fed said in language that was little changed from its June statement and left the central bank’s policy options open as it searches for a stopping point to the current tightening cycle.

As it stated in June, the Fed said it would watch incoming data and study the impact of its rate hikes on the economy “in determining the extent of additional policy firming that may be appropriate” to reach its 2% inflation target.

Though inflation data since the Fed’s June 13-14 meeting has been weaker than expected, policymakers have been reluctant to alter their hawkish stance until there is more progress in reducing price pressures.

Fed Chair Jerome Powell said any future policy decisions would be made on a meeting-by-meeting basis, and that in the current environment officials could provide only limited guidance about what’s next for monetary policy.

But he didn’t rule out action if it was deemed necessary.

“It is certainly possible that we would raise the funds rate again at the September meeting if the data warranted, and I would also say it’s possible that we would choose to hold steady at that meeting” if that was the right policy call, Powell said in a press conference after the release of the policy statement.

But Powell cautioned against expecting any near-term easing in rates. “We’ll be comfortable cutting rates when we’re comfortable cutting rates, and that won’t be this year,” Powell said.

Yields on both the two- and 10-year Treasury notes moved down modestly from levels right before the release of the Fed’s policy statement, while U.S. stocks ended mixed. Futures markets showed bets on the path of Fed rate increases over the remainder of the year were little changed, seeing small odds of a rise in September.

“The forward guidance remains unchanged as the committee leaves the door open to further rate hikes if inflation does not continue to trend lower,” said Kathy Bostjancic, chief economist at Nationwide. “Our view is the Fed is likely done with rate hikes for this cycle since continued easing of inflation will passively lead to tighter policy as the Fed holds the nominal fed funds rate steady into 2024.”

‘Moderate’ growth

Key measures of inflation remain more than double the Fed’s target, and the economy by many measures, including a low 3.6% unemployment rate, continues to outperform expectations given the rapid increase in interest rates.

Job gains remain “robust,” the Fed said, while it described the economy as growing at a “moderate” pace, a slight upgrade from the “modest” pace seen as of the June meeting. The U.S. government on Thursday is expected to report the economy grew at a 1.8% annual pace in the second quarter, according to economists polled by Reuters.

Powell said he’s still holding out hope the economy can achieve a “soft landing,” a scenario in which inflation falls, unemployment remains relatively low and a recession is avoided.

“My base case is we’ll be able to achieve inflation moving back down to our target without the kind of really significant downturn that results in high levels of job losses,” he said, while noting that outlook is “a long way from assured.” He also noted that Fed staff economists are no longer predicting a recession as they have at recent meetings.

With about eight weeks until the next Fed meeting, a longer than usual interlude, continued moderation in the pace of price increases could make this the last rate hike in a process that began with a cautious quarter-percentage-point increase in March 2022 before accelerating into the most rapid monetary tightening since the 1980s.

In the most recent economic projections from Fed policymakers, 12 of 18 officials expected at least one more quarter-percentage-point increase would be needed by the end of this year.
…