Federal Reserve Chairman Jerome Powell has once again indicated a commitment to increasing interest rates, citing the resilience of the U.S. economy. On Wednesday, he emphasized that more tightening policies will be forthcoming this year. Powell suggested that the Federal Reserve might hike interest rates in July and September to curb persistent price pressures and cool off an unexpectedly strong U.S. labor market.
On June 28, the heads of the four major central banks of the UK, US, EU, and Japan appeared together at a forum organized by the European Central Bank. When asked if the Federal Reserve planned to increase rates at every other meeting following this month's decision to hold off, Powell noted that it was a possibility, but not a certainty, and that consecutive hikes during two meetings weren't off the table. He reiterated that most Fed policymakers are predicting at least two more rate hikes this year.
Powell pointed out that while monetary policy is restrictive, it might not be restrictive enough, and perhaps not for a long enough period.
At this month's Federal Open Market Committee (FOMC) meeting, the Federal Reserve paused on raising interest rates as expected but adopted a hawkish tone, hinting at two more hikes. The Fed stated that the pause allows it to assess future information and impacts. A dot plot revealed that two-thirds of Fed officials expect this year's interest rate to be above 5.5%, indicating at least two 25 basis point hikes. Fed officials raised their median expectation for the peak interest rate by 50 basis points to 5.6% and doubled this year's GDP growth expectation to 1%, while lowering unemployment rate expectations for this and the following years and raising this year's core PCE inflation expectation.
Following Powell's comments on the outlook for Fed rate hikes, the S&P 500 Index fell by 0.4% to a daily low before U.S. stocks rebounded, with the S&P 500 Index momentarily rising.
Most economists predict that the Federal Reserve will raise interest rates by 25 basis points in July, adjusting their expectations for the Fed policy rate level to 5.375% by the end of this year and 4.375% by the end of next year.
The "Fed Watch Tool" from the Chicago Mercantile Exchange (CME) shows that the current U.S. Federal Funds rate futures market predicts a roughly 77% chance of a 25 basis point rate hike by the Fed in July. Assuming a 25 basis point increase each time, there is less than a 23% chance of at least two more rate hikes from this month to the end of the year. This is in line with the majority of Fed officials' predictions, suggesting two more rate hikes this year.
