The Federal Open Market Committee (FOMC) of the Federal Reserve is meeting today and tomorrow for the 5th time this year. But here is no real secret that the Fed will raise its target rate for Fed Funds by 0.25% to a target of 5.50%.
This is one of the easier forecasts because the Fed has already signalled the next move in advance. There is no evidence this has changed.
Inflation has cooled off considerably since the peak of 9.1% (annualized) in June 2022 but 3.0% inflation is not 2.0% and therefore the Fed’s mission has not been accomplished yet. So, the Fed’s task is not over and continued vigilance against inflation is still needed.
What is not clear yet is whether inflation is coming down on its own because rates are high enough, which would mean the so-called terminal rate has already been hit, or whether inflation is coming down because the Fed keeps raising rates, and therefore more rate hikes are needed to get inflation to the set target over 2% or under.
Of course, if the former is true, the Fed may trigger a recession and higher unemployment by continuing to raise rates. But the Fed has internalized that risk; they don’t really care. Inflation has been Job One since March 2022, and the Fed has said repeatedly that they will accept a recession if that’s what it takes.
The Fed skipped a rate hike in June. But they made it clear that this was not a pause and end of rate hikes but a skip to return to further rate hikes later. The Fed even released forecasts suggesting that they might do two rate hikes in the second half of the year.
After Wednesday’s rate hike, it will become a lot more difficult to forecast the Fed’s next moves. We will have to wait and see because they will not declare that rate hikes are over or reached the terminal rate. They need to keep their options open. They will watch August inflation data carefully to consider the next move on September, 20.
Whether the Fed will actually skip a rate hike at the next meeting or not is too soon to tell. We will have to see more data on inflation during August.
Sven Franssen