In July 2023, the Federal Reserve raised its target federal funds rate by 0.25%, marking the 11th increase since March 2022 and bringing the rate to a range of 5.25% to 5.50%, the highest since early 2001. The Fed's current rate policy is a significant shift from its previous "easy money" stance, as it aims to combat inflation and slow economic growth through higher borrowing costs.
The Fed also retained its commitment to reversing its quantitative easing policy, reducing its balance sheet by not purchasing new securities to replace maturing bonds.
“The worst outcome for everyone, of course, would be not to deal with inflation now and not get it done," Fed Chair Jerome Powell told U.S. Wealth Management. "If you go through a period where inflation expectations are not anchored (and) inflation is volatile, it interferes with people’s lives and with economic activity. There’s less pressure on the Fed to quickly shift course. The focus will continue to be on managing the inflation threat.”
According U.S. Wealth Management, the Federal Reserve increased its target federal funds rate by another 0.25% during its July 2023 Federal Open Market Committee meeting, over a year and a half after it first made a significant policy adjustment. Since March 2022, there have been 11 increases in interest rates. The target fed funds rate now ranges from 5.25% to 5.50%, which is the highest level it has been since early 2001.
Jerome Powell, the chairman of the Federal Reserve, said that the rate increase in 2023 might not be the final one and that the Fed is not expected to start decreasing rates this year. The Fed's "easy money" posture, which was in place since the 2008 financial crisis, has drastically changed from its current rate policy. The Fed funds rate was in the range of 0.00% to 0.25% throughout the most of that time, including 2020 and 2021. As inflation soared in March 2022, the Fed changed course and swiftly increased rates for the balance of 2022 and into 2023.
Additionally, the Fed remained committed to ending its previous quantitative easing (QE) program, which included buying treasury and mortgage-backed assets. The purpose of QE was to increase the liquidity of the capital markets. From a height of nearly $9 trillion, the Fed is now reducing the amount of these assets on its balance sheet. In conjunction with increasing interest rates, this so-called "quantitative tightening" strategy aims to restrain inflation by reducing economic growth through higher borrowing costs.
Cost-of-living increases, which had been almost unimportant for decades, started to dominate consumer concerns in early 2021 and are still a problem today, despite great progress. Consumer Price Index (CPI) headline inflation decreased sharply from 9.1% for the 12-month period ending in June 2022 to 3.0% for the year ending in June 2023.
Although it is rising, inflation is higher than the Fed's long-term goal rate of 2%. After the July 2023 meeting of the Federal Reserve, Powell said, "We intend to keep policy restrictive until we are confident that inflation is coming down sustainably to our 2% target, and we're prepared to further tighten if that's appropriate."
Powell emphasized that core inflation, a crucial indicator of living expenses that excludes the unstable food and energy sectors, is still significantly higher than the headline CPI figure of 3%. For the 12-month period ending in June 2023, the core CPI is 4.8%.
Even though recent inflation readings have improved, according to Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management, "the Fed hasn't yet seen an all-clear signal that inflation is subdued for good," he told U.S. Wealth Management.
Haworth claims that wage increase is one particular area for worry. A weaker employment market that will help restrain wage growth is one indicator of the Fed's performance. According to Haworth, the labor market indicators have not yet shown the Fed's initiatives to be effective. He points out that the unemployment rate is still below 4% and that there are many more open positions than there are unemployed people.
According to recent data, worker compensation costs increased 4.4% for the year ending in June 2023, which is a minor decrease from earlier levels. Haworth thinks that the Fed uses wage growth as a key metric to gauge its success in battling inflation.
