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Federal Reserve Leans Towards Future Rate Hikes Amid Persistent Inflation

Intense labor market and heightened inflation levels push Federal Reserve towards further rate increases, according to the latest meeting details.

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FED logo

Fed's Call for Additional Rate Hikes in 2023

During their June 13-14 meeting, almost all Federal Reserve policymakers expressed a desire to recommence rate hikes after pausing at the June meeting. The primary reasons for this were the robust labor market and a level of inflation they deemed "unacceptably high". The majority of participants noted in their economic projections the necessity of additional increases in the target federal funds rate for 2023.

Chair Jerome Powell's Stance on Monetary Policy

In the weeks succeeding the meeting, Fed Chairman Jerome Powell augmented the anticipation for the Fed to restart hiking. He insisted that the present monetary policy was not adequately restrictive, leaving the door open for potential consecutive meetings to discuss rate hikes.

Division Among Fed Members Over Rate Hikes

However, there remains a faction of Fed members who question the need for additional rate hikes to control inflation. They propose that the existing rate level—the highest since August 2007—and the tightening implemented thus far could successfully decelerate price pressures.

Atlanta Fed President's Inflation Concerns

Raphael Bostic, the Atlanta Fed President, voiced concerns that further rate hikes could excessively drain the economy's momentum. Bostic further elaborated that if inflation continues to surge, the real rate levels will increase, leading to "passive tightening" that could further suppress inflation.

Fed's Unchanged Rate and Hike Forecast

In its meeting on June 14, the Federal Open Market Committee maintained its benchmark rate at a range of 5% to 5.25%. This decision marked the first time since a series of ten consecutive hikes that the Fed decided against changing the rates. Fed members, during the meeting, revised their rate-hike forecast and projected a peak rate of 5.6% by mid-2023, indicating two more possible hikes.

The Unrelenting Inflation

The core personal consumption expenditures price index, the Fed’s preferred measure of inflation, was projected to be 3.9% in 2023. This estimate is a significant increase from the previous prediction of 3.6%. Annualized inflation, currently at 4.6%, was unanimously deemed "unacceptably high" by the Fed members.

Federal Reserve
Federal Reserve

Market and Trader Expectations

Markets seem receptive to the Fed’s projections for more hikes, with about 86% of traders expecting the U.S. central bank to recommence rate hikes at the July 25-26 meeting. This anticipation is mirrored in the U.S. 2-year Treasury yield, a key indicator sensitive to Fed policy changes, which has seen an increase closer to a 52-week high of 5.084%.

Impending Economic Data and Labor Market Tightness

The June monthly jobs report and consumer inflation report will be crucial in shaping investor attention ahead of the Fed’s July 25-26 meeting. The persisting labor market tightness is a key concern for the Fed, as it threatens to inflate wages and keep service inflation elevated.

Labor Market Signals Ahead of the Monthly Report

Jeffiers, a financial analyst, highlights mixed signals in the labor market ahead of the monthly report. While last month saw significant job losses and an increase in initial jobless claims in mid-June, expectations for solid monthly payroll data on Friday remain high. The analyst notes that despite the initial claims data's weakness, the expectation is for the payroll data to demonstrate another solid increase, consistent with recent trends.