Fed Resumes Rate Hikes Amid Inflation Concerns

The Federal Reserve is set to resume its interest rate hike trajectory, with expectations of a quarter percentage point increase following a pause in the previous month. If the 0.25% rate hike occurs, the Fed's policy rate, known as the fed funds rate, will enter a new range of 5.25% to 5.5%, reaching its highest level in 22 years. This upcoming rate hike will be the 11th increase since March 2022. Unlike previous meetings, no new interest rate projections or economic forecasts are expected to be released this time. All attention will be on Federal Reserve Chair Jay Powell and his outlook on monetary policy. Powell is anticipated to take a firm stance on inflation, indicating the possibility of another rate hike in September as the central bank works towards reining inflation back to its 2% target. The Fed's latest expectations show that inflation is now expected to end the year closer to 4%, up from the previously projected 3.6%, nearly doubling its inflation target. Gregory Daco, EY's chief economist, believes that Powell will sound more hawkish than before, considering the forward-looking inflation and labor market dynamics. Policymakers are cautious about markets prematurely pricing the Fed's terminal rate and expecting rapid rate cuts in 2024, as it could lead to looser financial conditions and potential upside risks to demand and inflation. In the prior month, the Fed had indicated plans for two more rate hikes in the second half of the year, driven by higher expectations for core inflation. The current rate hike will be the first of the two hikes the Fed had outlined. Despite inflation data showing a slower increase in consumer prices in June compared to the peak last summer, Powell is likely to emphasize that there is more work to be done. Headline CPI rose 3%, down from the previous year's peak of 9%. However, on a "core" basis, which excludes food and gas costs, inflation still rose by 4.8% over the past year. The Federal Reserve's monetary policy decision will be announced at 2:00 p.m. ET on Wednesday, followed by a press conference featuring Fed Chair Jerome Powell at 2:30 p.m. ET. As inflation remains a top concern for the central bank, Powell's statements and the Fed's actions will be closely monitored by markets and investors, with potential implications for interest rates, financial conditions, and the overall economic outlook.