According to a press release, after a succession of 11 interest rate increases that date back to the early months of 2022, financial stakeholders remain attuned to the Federal Reserve (Fed), meticulously scrutinizing any indications of prospective additional rate hikes. The Federal Open Market Committee (FOMC), the body responsible for formulating policy, is scheduled to convene in mid-September.
“The worst outcome for everyone, of course, would be not to deal with inflation now and not get it done," Jerome Powell, Chairman of the Fed, said. “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.”
During its preceding session in July, the FOMC enacted a supplementary 0.25% ascent in the federal funds' target rate. This elevation brings the fed funds rate to a spectrum of 5.25% to 5.50%, its most elevated point since the initial stages of 2001. Powell hinted at the possibility of not concluding the year without another rate hike in 2023, dismissing the commencement of rate cuts within the same period.
The prevailing rate strategy of the Fed contrasts starkly with its preceding posture of "easy money" which had been upheld since the repercussions of the financial crisis in 2008. During an extended period, encompassing 2020 and 2021, the fed funds rate lingered within the confines of 0.00% to 0.25%. However, in March 2022, propelled by mounting inflation, the Fed underwent a pronounced shift in course and expedited the progression of rate hikes throughout the course of the ensuing year and well into 2023.
In addition, the Fed has persisted in its commitment to reverse its earlier policy of quantitative easing (QE) which involved procuring Treasury and mortgage-backed securities. The QE strategy aimed to infuse greater liquidity into capital markets. Currently, the Fed is methodically reducing its balance of these assets from a peak level near $9 trillion. This approach, termed "quantitative tightening," in conjunction with heightened interest rates, endeavors to rein in inflation by decelerating economic growth through increased borrowing expenses.
The cost of living surge, a relatively latent concern for numerous decades, emerged as a prominent apprehension for consumers at the inception of 2021 and despite marked amelioration, continues to persist as a prevailing issue. Headline inflation, gauged by the Consumer Price Index (CPI), precipitously plummeted from 9.1% for the annual period culminating in June 2022, to 3.2% for the year concluding in July 2023.
