The all-important Federal Reserve meeting will be held next week on July 26–27. At its June meeting, the Fed hiked the rates by 75 basis points, the highest since 1994. With the July meeting looming, what decision will the U.S. Central Bank make?
After the June meeting, the Fed’s dot plot called for another 175 basis point rate hike through the course of 2022. It also raised the forecast for interest rates for both 2022 and 2023. U.S. inflation increased by an annualized pace of 8.6 percent in May, which prompted the Fed to raise rates by 75 basis points in June.
Here's what to expect from the Fed's July meeting.
When raising rates by 75 basis points in June, Fed Chair Jerome Powell signaled that the 75-basis point rate hike is an exception rather than a rule. Usually, the Fed raises rates by 25 basis points or 50 basis points, and higher hikes occur only in an exceptional scenario.
Between 2015 and 2018, the Fed gradually raised rates by 25 basis points. But then, with U.S. inflation running near multi-decade highs, and the Fed getting worried that it could get entrenched, we are in an “exceptional scenario.”
Some economists expect a 100 basis point hike in July.
Some economists are now calling for a 100 basis point rate hike at the July meeting. The last time the Fed raised rates by 100 basis points was in the 1980s. According to the CME Fed Watch tool, two-thirds of the traders expect the Fed to raise rates by 75 basis points, while the remaining one-third expect a 100 basis point rate hike.
The Fed is front-loading its rate hikes, which will help tame inflation. However, despite the 150-basis point rate hike so far in 2022, inflation has only continued to rise. In June, the inflation rate hit 9.1 percent, which wasn't only a new multi-decade high but also worse than expectations. U.S. inflation was higher than expected in May also which was eventually followed by a 75 basis point rate hike in June.
A 75 basis point rate hike looks almost certain in July.
A 75 basis point rate hike looks almost certain at the Fed’s July meeting. The Fed might even consider a higher rate hike but its probability looks quite low even as some brokerages like Citi see a 100 basis point hike as the most likely scenario.
The Fed’s credibility is at stake as it tries to undo its mistake of sticking with low interest rates for far too long. Until about November 2021, the Fed maintained that inflation is transitory and will come down once the supply chain situation improves. However, it subsequently retired the term “transitory” and embarked on among the most aggressive monetary policy tightening cycles in recent history.
The Fed needs to balance recession risks and inflation concerns.
At a Congressional hearing, Powell admitted that the Fed’s rate hikes could push the U.S. economy into a recession. However, he has denied on more than one occasion that the Fed is deliberately trying to induce a recession in the country.
When the FOMC meets for the July meeting, the Committee members will need to balance the concerns about higher inflation and recession risks in the U.S. The cure for one could end up aggravating the other, which proverbially leaves the Fed between a “rock and a hard place."