Fed raises interest rates to 22-year high

After a month-long pause, the US Federal Reserve (Fed) raised interest rates again and signaled another tightening this year.

On July 26, after a two-day policy meeting, the Fed announced a 25 basis point (0.25%) interest rate hike. The benchmark interest rate in the US is currently around 5.25-5.5% - the highest since 2001.

The Fed said the job market remained strong and the economy was growing at a "moderate" pace, a more upbeat assessment than in June, when Fed officials said growth was "modest."

The Fed paused its tightening last month to assess the state of the economy after the collapse of three regional banks earlier this year. It has raised interest rates 11 times since March 2022, aiming to cool inflation that remains double its target.

Fed Chairman Jerome Powell at a press conference on July 26. Photo: AP

The Fed funds rate applies to overnight interbank loans. While it is not the rate consumers pay, it can still influence the interest rates on loans and savings they encounter on a daily basis, such as mortgages, auto loans, and credit cards.

Fed officials also predicted another interest rate hike this year. Inflation in the US has cooled down in recent months, which is a welcome sign for both the people and businesses of this country. However, the Fed's announcement affirmed that "inflation is still accelerating" and that the agency "remains very concerned about inflation risks."

"In deciding the appropriate pace of tightening to move inflation gradually toward 2 percent, the committee will assess the overall trajectory of monetary policy, the lags in its effects on economic activity and inflation, and other economic and financial developments," the Fed said in a statement.

The agency's preferred inflation gauge, the Personal Consumer Expenditures Price Index (PCE), rose 3.8% in May from a year earlier, down from a month earlier. Core PCE, however, was nearly flat in April. The Commerce Department will release June figures this week.

Fed officials are keeping the option of raising rates again, in case inflation is stronger than expected. However, the timing of the hike remains a question mark. In fact, it may not happen at all and the Fed will move to a new phase of its inflation war, holding rates steady until inflation returns to its target.

Investors are still betting on the Fed stopping its rate hikes early and the U.S. having a soft landing — inflation returning to 2% without a sharp slowdown in the economy. But Fed officials have stressed that they will make decisions based on data and adjust on a meeting-by-meeting basis. The next Fed meeting is in September.

"We intend to continue tightening policy until we are confident that inflation is moving steadily toward our 2% objective. We are also prepared to tighten further if appropriate. There is still a long way to go," Fed Chairman Jerome Powell said at a press conference.

He said the Fed could raise or keep interest rates unchanged in September. However, Powell also warned that "it will only cut rates when it feels comfortable, and that will not happen this year."

The Fed chairman still expects a soft landing and said economists at the Fed are no longer forecasting a recession.

Ha Thu (according to CNN)

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