Michelle M. from Redding, CA asks: Hello Mitch, I know everyone expected the Federal Reserve to raise interest rates again last week. I’m curious if you think they’re done and whether you think rates and the economy are “landing” in the right place. Thank you!
Mitch’s Response:
The Federal Reserve indeed wrapped up their two-day meeting last week with another 25-basis point rate increase, which pushed the benchmark fed funds rate to a 22-year high. The Fed has hiked rates 11 times since March 2022, with the benchmark rate now sitting at a range between 5.25% and 5.5%.1
I don’t think it’s possible to know at this stage whether or not the Fed is done. In his remarks following last week’s Fed meeting, Chairman Powell said it was too soon to tell whether the economy and inflation would cool enough in the coming quarters to warrant ending the rate hike campaign. So, if you want to predict whether rate hikes are over, you’d also need to be able to predict where inflation will be in September. It isn’t possible to know for sure.
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We did see some very positive news on Friday of last week, however, with the release of the Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) price index. The Commerce Department reported that the PCE price index rose 3% in July from a year ago, which was down substantially from May’s 3.8% pace. The Core PCE price index, which matters more to the Fed since it excludes volatile food and energy categories, eased to 4.1% year-over-year in July from 4.6% in May. 4.1% inflation is still double the Fed’s 2% target, but the declining trend looks promising.
The Fed’s next meeting is in September, which means July’s PCE price data will be meaningful to the Fed’s next move. That data gets released in late August. From the market’s perspective, however, I’m not sure that another 25 basis point increase matters all that much. Higher rates can crimp the value of forward earnings, of course, but at this stage, the market has likely already priced in the possibility of the terminal rate landing somewhere between 5% and 6%. In other words, there would not be much surprise power for corporations or markets if the Fed hiked again.
It may be that inflation continues in a downtrend next month, then the Fed may pause in September and wait until November or December to make an additional increase if they do at all. There is also the possibility that economic growth continues to moderate between now and then, which would put some pressure on labor markets and also the employer cost index, which is an underlying force influencing inflation. That would be another reason for the Fed to hold off.
Chairman Jerome Powell seemed to leave the door open for all possibilities in his comments following the last meeting when he said “We have to be ready to follow the data, and given how far we’ve come, we can afford to be a little patient, as well as resolute, as we let this unfold.”
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• A brief history of Fed rate hike campaigns, and why they mattered
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Disclosure