By
Chimamanda U. Martha
May 3rd, 2024
The recent Fed increase in interest rates has put the midpoint of the target range at the highest level in over two decades.
The Federal Reserve (Fed) has approved another hike in interest rates as the US apex bank continues to fight inflation. The funds rate is now the highest it has been in over 22 years.
The Fed’s Federal Open Market Committee (FOMC) agreed to increase rates by 25 basis points to a range of 5.25%-5.50%. The midpoint of the range is the highest interest rate in the US since 2001.
In a news conference, Fed Chairman Jerome Powell said the rate hikes are still necessary. According to Powell, the US is still a long way from its intended 2% target. The Chairman also added that another rate hike is possible this year. Powell said:
“I would say it’s certainly possible that we will raise funds again at the September meeting if the data warranted. And I would also say it’s possible that we would choose to hold steady and we’re going to be making careful assessments, as I said, meeting by meeting.”
The Fed’s decision to raise interest rates by a quarter percentage point ties in with a prediction from economists polled by Reuters. The economists said they expect a 25-basis-point hike at the meeting on Wednesday. However, they predicted that the hike would be the last of the Fed’s current tightening cycle. Powell’s hint at a September hike negates the economists’ forecast.
Interestingly, members of the FOMC also expect more hikes. In June, nine members said they expect at least 1, and up to 4 more increases this year. However, two members said there will be no more until next year.
Fed May Effect More Hikes in Interest Rates
The Fed published a statement after the meeting, making a few confirmations about the economy. In the statement, the Fed said economic activity has been expanding moderately, while the last few months have seen “robust” job gains. The report also adds that the unemployment rate is low. Nevertheless, the central bank is still concerned that “inflation remains elevated”.
On the possibility of subsequent hikes, the statement notes that the FOMC will continue to monitor the economy and is willing to adjust monetary policy if deemed appropriate. The statement however promises that all decisions will consider several indicators, including financial development, inflation pressures, and conditions in the labor market,
According to the US chief economist at audit and consulting services firm RSM Joe Brusuelas, the Fed needs to pause the hike to allow the economy the time it needs to adjust to the effect of previous increases. Brusuelas believes that the general improvement in employment, job creation, and other economic indicators is the first step in creating conditions that can placate the Fed enough to stop rate hikes.
Interest rates directly indicate bank charges for overnight lending. However, the rest of the economy eventually feels the effect of these increases, as they affect mortgages, loans, credit cards, and other types of consumer debt.