FOMC Decision – 07/26/23

The Federal Reserve increased its key interest rate by 0.25% today, moving the federal funds rate to between 5.25% and 5.5%, the highest in 22 years. This decision came despite a reduction in inflation, and it suggests that further rate hikes could be expected if the economy continues to perform well.

The Fed considers a range of factors, such as inflation trends, economic developments, and financial activities, to decide if more rate increases are necessary. There are indications that another increase may occur in September or November.

The central bank noted that economic activity has been growing moderately and the job market remains robust, which might push inflation up and justify another rate increase. The recent rate hike implies that borrowing costs will rise, impacting consumer and business loans, while bank savings yields may also increase.

The Fed had previously raised its benchmark short-term rate by 5 percentage points in 14 months, its largest increase in four decades, then paused in June. There’s speculation that further rate increases may follow to control inflation, which last year peaked at a 40-year high of 9.1%. Although the overall inflation rate has slowed, the core rate remains high.

The current economic situation in the U.S. is stable, with expectations of a solid 1.8% growth in the second quarter. Job additions and wage growth, although slower, are still robust. Consumer spending remains strong and financial conditions are favorable, as indicated by the steady climb of the S&P 500 stock index since March. These factors could persuade the Fed to raise rates once more.

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