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Tackling Inflation: Fed Navigates Economic Waters Amid Expected Interest Rate Hike

As the US economy shows resilience, the Federal Reserve finds itself walking the tightrope of balancing inflation and growth.


Anticipated Federal Rate Hike Amidst Slowing Inflation

The Federal Reserve is on course for another interest rate hike this week. Policymakers must weigh recent economic data indicating a stronger-than-anticipated US economy against potential inflation concerns. In the aftermath of the central bank's policy meeting in June, inflation has decelerated more than expected toward the Fed's 2% target. Analysts argue that a cycle of moderating price hikes is underway, which should continue without additional rate hikes beyond the quarter-point increase expected to be announced on Wednesday.

The hope of a 'soft landing' orchestrated by the Fed, wherein inflation decreases, unemployment remains low, and a recession is avoided, has bolstered financial markets. However, this optimism could counteract the central bank's intentions. Policymakers may continue to promote a tough stance on inflation, despite recent data indicating a slowdown in inflation. As Diane Swonk, chief economist at KPMG, notes, the Fed "does not want to be head-faked by the recent deceleration in inflation and declare victory too soon."

Fed Open Market Committee Rate Decision on the Horizon

The Federal Open Market Committee is projected to increase its benchmark overnight interest rate to between 5.25% and 5.50% during its policy announcement on Wednesday. Fed Chair Jerome Powell will conduct a press conference shortly after to discuss the decision.

Revisiting Past Challenges to Inform Current Decisions

In the six weeks since their mid-June meeting, Fed policymakers have faced a reverse image of last year's circumstances. Previously, half a year of contracting economic activity indicated a looming recession, fast-rising prices, and the Fed's accelerated rate hikes. Now, they must decide how much positivity to acknowledge given the changed economic landscape.

The IMF's Positive Outlook for US Economic Growth

Despite signs of a potential slowdown, the International Monetary Fund has increased its outlook for US economic growth this year. The organization points to resilient consumption and a tight labor market supporting real income gains and a rebound in vehicle purchases as key factors.

Adjusting to Changing Financial Conditions

As US stock markets rise and other financial conditions show signs of easing, the Fed continues its attempt to moderate the economy. A new central bank financial conditions index suggests the peak tightness may have been reached last year.

While the economy continues to show signs of strength, Fed officials may question whether inflation will continue to decline. The possibility of more rate hikes remains open as policymakers assess the interplay of softer inflation numbers and economic growth. "It's not clear yet how much growth the Fed will tolerate during a period of softer inflation numbers," says Tim Duy, chief US economist for SGH Macro Advisors.