Fed may soon raise interest rates to a 22-year high

Fed officials are expected to raise interest rates for the 11th consecutive time, to the highest level since 2002, at this week's policy meeting.

The US Federal Reserve's (Fed) two-day policy meeting will end on July 26. The Fed's Federal Open Market Committee (FOMC) is expected to raise interest rates by 25 basis points (0.25%), bringing the reference interest rate to 5.25-5.5%.

Investors will be looking later for comments from Fed Chairman Jerome Powell on whether the central bank will raise interest rates again this year. With inflation easing in June, investors see a rate hike at this week's meeting as a near certainty. However, they do not expect further rate hikes.

“The Fed is keeping all options open. They are still cautious when inflation has only been easing for a few months. That’s not enough to convince the Fed that their job is done,” said Veronica Clark, an economist at Citigroup.

Fed interest rate adjustments from 2006 to 2022. Chart: Reuters — Fed interest rate adjustments from 2006 to 2022. Chart: *Reuters*

The Fed is slowing its rate of interest rate hikes as it believes the economy has tightened enough to gradually return to 2% inflation. Still, Powell and his fellow Fed officials need to show determination to prevent inflation from suddenly spiking again.

“They don’t want to repeat the mistake they made in the fight against inflation in the 1970s and 1980s, when they let off the brakes too early,” said Kathy Bostjancic, an economist at Nationwide Life Insurance.

Economists at Deutsche Bank expect Fed officials to signal further tightening. They are likely to call economic growth “modest,” despite recent upbeat data. Deutsche Bank also expects the Fed to refrain from mentioning risks to the banking system, which it said last month was “remaining strong and vibrant” after three consecutive crashes.

“The question after this week’s policy meeting is: Are they going to raise rates again?” said Vincent Reinhart, chief economist at Dreyfus and Mellon. Powell will also have to assess the latest consumer price index (CPI). If he wants to raise rates again, he could downplay the report’s importance, since the Fed’s preferred inflation measure is the Personal Consumption Expenditures Price Index (PCE).

In addition, according to the minutes of last month's meeting, although Powell said the US still had the possibility of a soft landing, Fed officials still predicted a US recession. However, with recent optimistic data, the Fed Chairman is expected to continue to maintain this view.

Ha Thu (according to Bloomberg)

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