Investors and economists are bracing for another rate hike this week as central bank officials gather in Washington for their July meeting. Their two-day meeting, July 26-27, comes as the Federal Reserve works to combat skyrocketing inflation that has left families across the country struggling to make ends meet.
Economists expect Fed officials to raise the fed funds rate by 75 basis points, taking it to between 2.25% and 2.50%, which is where it was at its most recent high in the summer of 2019. before the coronavirus pandemic.
This will mark theof the year, as consumer prices have risen at the fastest rate in more than 40 years. Five months ago, the fed funds rate was close to zero percent. At its June meeting, the Federal Open Market Committee raised the fed funds rate a more aggressive 75 basis points for the first time in nearly 30 years, following a 25 basis point and 50 basis point hike at meetings in March and May, respectively.
“Some Fed officials left a 100 bps hike on the table after last week’s strong CPI report, but a pullback in inflation expectations appears to have persuaded the committee to stick to its original plan,” economists at Goldman Sachs in a pre-meeting note. . They also said that financial conditions “have already tightened enough to put the economy on a low enough growth trajectory.”
With consumer prices up more than 9% from a year earlier, additional rate increases are expected through the end of the year.Fed officials projected that the rate would rise to more than 3% by 2023. The committee will meet again in September, November and December.
Economists and investors will be watching to see what guidance Federal Reserve Chairman Jerome Powell will give on future meetings. In a note on Monday, Deutsche Bank said its economics team expects increases of 50 basis points in September and November before a 25 basis point increase in December.
Increases in the fed funds rate have led to higher borrowing costs for Americans. According to Greg McBride, chief financial analyst at Bankrate.com, debt with variable rates, such as credit cards and home equity lines of credit, will be hit the hardest.
“Consumers should look for low-rate credit card balance transfer deals and do so urgently to protect themselves from further rate increases and move forward on debt repayment,” McBride said. “Ask your lender if locking the interest rate on the outstanding balance of your home equity is an option.”
The Federal Open Market Committee comes as several other key economic data are scheduled to be released this week. On Thursday, the Commerce Department will release its report on GDP for the second quarter of 2022, which could show more signs that the US is in a recession after the measure of economic activity declined in the first quarter of the year. .
On Monday, President Biden said during an event that the United States will not enter a recession, noting that the unemployment rate is close to its pre-pandemic level at 3.6%. Over the weekend, Treasury Secretary Janet Yellen, who also previously served as chair of the Federal Reserve, acknowledged in an interview that the economy is slowing but said it is not an economy in recession. The National Bureau of Economic Research determines if the United States is in a recession. Yellen argues that the economy is in a period of transition.
The Commerce Department will also release its latest report on the personal consumption expenditures price index for June on Friday, the preferred gauge of inflation used by the Federal Reserve.