On Wednesday, the Federal Reserve will announce a new interest rate hike. Investors hope (and believe) it will be the last.
Markets brace for the Federal Reserve monthly meeting on Wednesday, expecting the 11th interest rate increase since March 2022. Markets put at 97% the probability for a new hike.
The Federal Reserve stopped increasing interest rates in June as fresh inflationary data showed better performances than expected. US headline consumer prices dropped to 3%, just one percentage point away from the Fed’s target.
Further, continuous rate hikes are hampering American economic growth, with firms collapsing at a worrying rate despite an AI-driven market rally.
Core inflation, however, remains perilous (in the United States and Europe alike), hence why Fed Chairman Jerome Powell announced new hikes were coming. Core inflation in the United States is at 4.83%.
Wednesday’s hike will bring interest rates to 5.25-5.5%, the highest level since 2001.
Markets are hoping this will be the last rate hike in a long time, though others forecast at least another in 2023. The most hawkish predictions have the first rate cut in June 2024. It will all depend on inflation performances after the summer.
"The signal will probably be, yes, we’re hiking, but then we think we can sit here for a while and see," said chief strategy at Charles Schwab Kathy Jones. “But no promises. They can’t give up the option.”
To hike or not to hike
According to many, Wednesday’s hike is unnecessary given the constant drop in inflation. The yearly rate of inflation dropped to 3% in June, and there is every sign of a further decrease in July.
Furthermore, rate hikes come at great costs to the economy’s health. Earlier this year, the Fed’s swift and violent monetary tightening almost caused a banking crisis. Three of the country’s biggest financial institutions (Silicon Valley Bank, Signature Bank, and First Republic) collapsed in just 90 days.
Though unemployment seems to be steadily low, middle-income firms are collapsing at a record pace, signaling a recession ahead. Overall, an economic contraction seems inevitable if interest rates continue to grow.
On the other hand, the Federal Reserve needs to be absolutely certain inflation is curbed for good. There can be no room for error, and creeping inflation can present a tough nut to crack.
Luke Tilley, the chief economist at Wilmington Trust Investment Advisors, labeled Wednesday’s hike as "unnecessary". However, he added, "I’m also quick to say that if I was in their seats, I might be doing the same thing because they really are playing a game of risk management.”
