Next Fed hike expected at 25 basis points

Will it be the final one in current tightening cycle?
Next Fed hike expected at 25 basis points
Federal Reserve building, Washington DC

It looks like U.S.core inflation rates are not low enough for the Federal Reserve to maintain the status quo which will look to increase its benchmark overnight interest rate by 25 basis points to the 5.25%-5.50% range on July 26. The FED paused rate hikes at last June’s policy meeting.

The majority of 106 economists polled by Reuters agreed that it will be the last increase of the current tightening cycle.

Read: U.S. inflation is slowing down, still far from the Federal Reserve’s target

The U.S. economy has proven resilient, exhibiting low unemployment levels at 3.6 percent more than a year since the FED began one of its most aggressive interest rate hiking campaigns in history.

The headline consumer price index (CPI) slowed to 3 percent in June from 4 percent in May 2023, and it prompted Wall Street observers to conclude inflation might soon be tamed and a return to quantitative easing might happen by the end of 2023. None of the inflation CPI gages polled by Reuters expected to reach 2%, the FED’s target, until 2025 at the earliest.

Experts are deliberating whether more rate increases might be needed to ensure the slowing down of the inflation rate continues or if doing more could undermine the economy.

Members of the Federal Open Market Committee suggest the benchmark overnight interest rate will peak at 5.50%-5.75%, but only 19 of 106 economists forecast meeting that range.

This makes the decision in September a difficult one for the FED which will have to decide whether to get its second hike out of the way or wait for worse signs that inflation is not on track to hit the central bank’s target of 2%.

Regardless, nearing its peak interest rate hiking cycle has pushed the dollar to its lowest level in more than a year against major currencies, which makes imports costlier and keeps inflation elevated.

Core inflation, which strips out food and energy prices, will be only slightly lower or remain around the current level of just under 5% by end 2023, according to many polled by Reuters.

Nearly two-thirds of respondents expected a U.S. recession within the next year, with 85 percent believing it would start in 2023.

The U.S. economy was expected to grow 1.5% this year and then slow to 0.7% next year.

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