Federal Reserve expected to hike key interest rate

Investors and economists are bracing for another interest rate hike this week as central bank officials gather in Washington for their July meeting. Their two-day meeting, July 26 and 27, comes as the Federal Reserve works to fight rising inflation that has left families across the country struggling to make ends meet.

Economists expect Fed officials to raise the federal funds rate by 75 basis points — bringing the rate to between 2.25% and 2.50%, which is where it hit its most recent high in the summer of 2019, before the pandemic. of coronavirus.

This will mark the fourth interest rate hike of the year as consumer prices rose at the fastest pace in more than 40 years. Five months ago, the federal funds rate was close to zero percent. At its June meeting, the Federal Open Market Committee raised the federal funds rate by 75 basis points for the first time in nearly 30 years, following an increase of 25 basis points and 50 basis points at its March and May meetings, respectively.

“Some Fed officials left a 100bp hike on the table after last week’s firm CPI report, but a pullback in inflation expectations appears to have persuaded the Committee to stick with its original plan,” economists at Goldman Sachs said in a note anticipating the meeting. . They also said that financial conditions “have already tightened enough to put the economy on a sufficiently low growth path.”

With consumer prices up more than 9% year-on-year, further rate increases are expected through the end of the year. At your meeting last monthFed officials projected the rate would rise to more than 3% by 2023. The committee will meet again in September, November and December.

Economists and investors will be watching to see what guidance Federal Reserve Chairman Jerome Powell will give on future meetings. In a note on Monday, Deutsche Bank said its economic team expects increases of 50 basis points in September and November, before a 25 basis point increase in December.

Increases in the federal funds rate have led to higher borrowing costs for Americans. According to Greg McBride, chief financial analyst at Bankrate.com, debt with variable rates, such as credit cards and home equity lines of credit, will be the most affected.

“Consumers should look for low-fee credit card balance transfer offers and do so urgently to protect themselves from further rate hikes and advance debt repayments,” McBride said. “Ask your lender if fixing the interest rate on your home equity is an option.”

The Federal Open Market Committee comes as several other important economic data are scheduled to be released this week. On Thursday, the Commerce Department will release its second quarter 2022 GDP report, which could show even more signs that the US is in recession after the measure of economic activity fell in the first quarter of the year.

On Monday, President Biden said during an event that the US will not enter a recession, noting that the unemployment rate is close to its pre-pandemic level of 3.6%. Over the weekend, Treasury Secretary Janet Yellen, who also served as chairman of the Federal Reserve, acknowledged in an interview that the economy is slowing but said it is not a recession economy. Whether the US is in recession is determined by the National Bureau of Economic Research. Yellen argues that the economy is in a period of transition.

The Commerce Department will also release its latest report on the Personal Consumption Expenditure Price Index for June on Friday, the preferred inflation gauge used by the Federal Reserve.

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