One more rate hike possible this year: US Federal Reserve

The US central bank held its benchmark rate at a 22-year high but its hawkish outlook set off market jitters as investors braced for the impact of higher-for-longer interest rates

By Neha Bothra Forbes India Staff

Published: Sep 21, 2023 01:03:18 PM IST

Updated: Sep 21, 2023 01:42:11 PM IST

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In the face of slowing inflation and strong consumer spending, the Jerome Powell of Federal Reserve announced that interest rate will be kept steady, holding the benchmark borrowing rate to a range of 5.25% to 5.5%. Image: Chip Somodevilla/Getty Images

The Federal Open Market Committee (FOMC) voted unanimously to hold the federal funds rate between 5.25 percent and 5.5 percent. This is the second pause in three months after it raised rates by 525 points since March 2022. To be clear, this isn’t a policy reset. It reiterated, one, the need for price stability and, two, the fair possibility of a soft landing.

"The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive or restrictive for longer. Nonetheless, we’re committed to getting inflation back down to 2 percent—because we think that a failure to restore price stability would mean far greater pain later," US Federal Reserve Chairman Jerome Powell said.

The US Federal Reserve indicated another rate hike of 25 basis points later this year and fewer rate cuts—50 basis points versus 100 basis points projected in June—next year. The central bank’s outlook for the fed fund rate inched up to 3.9 percent, from 3.4 percent earlier, for 2025 and 2.9 percent for 2026. The US Fed expects to achieve its inflation target of 2 percent in 2026.

The US central bank expects the unemployment rate to rise to 4.4 percent next year. But US Federal Reserve officials increased their GDP forecast to 2.1 percent this year and 1.5 percent next year versus 1.8 percent and 1.1 percent projected earlier. This suggests that the bank does not expect an economic recession in the coming quarters. In fact, in the policy statement, the FOMC described economic activity as “expanding at a solid pace” versus “moderate” in the last meeting. Data suggests US consumer spending remained resilient even as savings dwindled with credit card debt crossing $1 trillion for the first time ever.

The policy statement shows the rate-setting committee is far more confident of growth picking up. This is driving its call for fewer rate cuts in 2024 as it does seem to be less worried about the rise in inflation. “Inflation has moderated somewhat since the middle of last year, and longer-term inflation expectations appear to remain well-anchored as reflected in a broad range of surveys of households, businesses and forecasters as well as measures from financial markets,” Powell said.

He elaborated that the recent spike in inflation was different from earlier episodes because this time it was largely a result of supply-side challenges. But he said he does see some signs of improvement as commodity prices seem to have peaked and supply chain disruptions are beginning to resolve.

"Part of this inflation is caused by this series of supply shocks that we’ve had, beginning with the pandemic, and the reopening of the economy, and more recently amplified and added to by Russia’s invasion of Ukraine. So, these are the kinds of events that are not really seen in prior business cycles, and, in principle, if those things start to get better could help ease the pressures on inflation," Powell explained.

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The tone of the policy didn’t hit the right note for most investors.

Oil prices fell by 1 percent and the US dollar index was up by 0.09 percent to 105.21. The S&P 500, Nasdaq Composite and Dow Jones Industrial Average closed in the red, declining 0.94 percent, 1.53 percent and 0.22 percent respectively. The negative sentiment on Wall Street weighed on Asian markets too. The Hang Seng Index and the Nikkei are down by close to 1 percent. India’s benchmark stock index, the S&P BSE Sensex, is trading lower by 0.8 percent.

However, some market watchers see the September policy in different light and are more optimistic given the reduced chances of a recession in the world’s largest economy.

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“Powell mentioned several times that the Fed will proceed ‘carefully’ and see data in totality, given how far they’ve come. We view his remarks as consistent with our expectations for the Fed to remain on hold from here, but retaining a hawkish bias in tone. The updated dot plot continues to project one more hike this year—although it is worth noting that the committee is more closely split than in June, with seven, and admittedly more influential, of the 19 participants now anticipating staying on hold through the year-end,” points out Emkay Global’s chief economist Madhavi Arora.

The Reserve Bank of India’s rate-setting panel will convene early next month to determine rates at its bi-monthly credit policy meeting. It is widely expected to hold the benchmark repo rate at 6.5 percent. Headline inflation climbed to a 15-month high of 7.4 percent in July, but eased to 6.83 percent in August largely due to lower vegetable prices. However, India’s central bank is on the front foot as it aims to bring down retail inflation to its target of 4 percent.