More Interest Rate Hikes May Still Be On Deck, Federal Reserve Warns - Forbes

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Topline

Interest rates could soar even higher as inflation remains stubborn, the Federal Reserve said Wednesday, dousing many investors’ hopes the Fed would soon reverse course and cut rates.

Key Facts

“Significant upside risks to inflation could require further tightening of monetary policy,” Fed officials said in minutes from the Fed’s July 25-26 meeting during which it hiked the target federal funds rate by 25 basis points to 5.25% to 5.5%, the highest level since March 2021.

Still, some officials noted there’s evidence that “some inflationary pressures could be abating” as headline inflation slips to a two-year low.

Stocks built on modest earlier Wednesday losses earlier after the Fed release, with the Dow Jones Industrial Average down 0.2%, or 70 points, by 2:05 p.m. ET.

Key Background

After 14 years of keeping rates between 0% and 2.5%, the Fed embarked last year on its most ambitious rate increase campaign in decades last spring. Tweaking the federal funds rate is the central bank’s most impactful tool at combating inflation, which surged during the pandemic, but the rapid increase in borrowing costs inflicted plenty of pain on the economy in recent months, more than doubling 30-year mortgage rates from 3% to 7%, spurring several large banks’ failures and helping cause thousands of high-profile layoffs.

What To Watch For

The next FOMC meeting will be September 19-20. There’s an 88.5% probability the Fed will keep rates steady and an 11.5% chance it will implement another 25 basis-point increase, according to futures trading tracked by CME Group.

Surprising Fact

Powell and other Fed staff have yet to voice support for rate cuts, but the market prices in a 100 basis-point decrease to 4.25% to 4.5% as the most likely scenario by the end of 2024.