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HomeWORLD NEWSUS Federal Reserve is likely to raise rates to a 22-year high.

US Federal Reserve is likely to raise rates to a 22-year high.

It is widely anticipated that the Fed will raise interest rates by 25 basis points; Fed chairman Jerome Powell will address the media after the decision is announced.

Wednesday, the US Federal Reserve is expected to announce a fresh quarter-point increase to its benchmark lending rate in an effort to combat inflation, while leaving the door open for additional rate hikes in the coming months.

After 10 consecutive rate hikes, the Fed stopped its aggressive campaign of monetary tightening last month to give policymakers more time to assess the health of the world’s largest economy.

Members of the rate-setting Federal Open Market Committee (FOMC) indicated at their June meeting that they anticipate two additional rate increases this year.

“It is anticipated that the Federal Open Market Committee will increase the target range for the federal funds rate by 25 basis points, but maintain a bias toward additional rate hikes, if necessary,” Oxford Economics’ chief US economist Ryan Sweet wrote in a client note.

A rate increase on Wednesday, the eleventh since the US central bank began its cycle of monetary tightening in March of last year, would raise the Fed’s benchmark lending rate to a range of 5.25 to 5.5 percent — its highest level in 22 years.

CME Group data indicates that futures traders see a probability of nearly 99 percent that the Fed will proceed with a quarter-point increase.

September skip?

If the Federal Reserve raises rates as anticipated, its benchmark will reach a level not seen since 2001.

Inflation has continued to decline since the June decision to halt rate hikes, although it remains above the Fed’s two percent long-term target.

In the meantime, the unemployment rate has remained near historic lows, and first-quarter economic growth has been revised markedly upward due to robust consumer spending data.

The improved economic outlook has increased the likelihood of a so-called “soft landing,” in which the Federal Reserve successfully reduces inflation by raising interest rates while avoiding a recession and a surge in unemployment.

Given the near-unanimity of forecasts for a rate increase on Wednesday, analysts and speculators will be closely observing Fed Chair Jerome Powell for hints about the central bank’s next move.

Edward Moya, a senior Americas market analyst at OANDA, wrote in a recent note: “They will likely signal that they want to observe the impact of the current tightening cycle and that they will likely forego raising rates in September.”

“They will likely make it clear that additional tightening is possible,” he added.

Sweet concurred, stating, “There is a chance Powell will indicate additional rate hikes are possible, but the Fed will take a more cautious approach, indicating it will skip a hike in September.”

Fed officials support price increases
Fed officials have predicted additional rate increases for this year.

Numerous FOMC members have publicly supported additional rate increases this year, particularly if last month’s positive inflation data proves to be an outlier.

After last month’s decision, Powell told a Congressional hearing, “Given how far we’ve come, it might make sense to move rates higher, but at a more measured pace.”

A few days later, he stated at a banking conference in Portugal, “I wouldn’t rule out moving to consecutive meetings at all.”

Christopher Waller, a Fed governor, told a banking conference in mid-July, “I expect two additional 25-basis-point increases in the target range over the four remaining meetings this year to keep inflation moving toward our target.”

While markets have priced in a rise on Wednesday, they are less optimistic about the likelihood of another hike at the September meeting.

According to CME Group, futures traders presently assign a probability of just over 20 percent that the FOMC will raise rates further in September.

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