Will the Fed keep raising interest rates in the next few months?

The Federal Reserve raised interest rate to 5.5%, its highest level since February 2001, following the Federal Open Market Committee meeting on 26 July. It was the 11th successive rate hike since March 2022 when the Fed began its campaign to cool the economy and get inflation under control. US inflation has been gradually declining and currently stands at 3% - down from 9.1% in June last year.

The latest inflation figures are due to be announced in the Bureau of Labor Statistics’ consumer price index report on Thursday when we will find out how much prices have risen during the past month and whether inflation is any closer to the FOMC’s target of 2%.

There will be three FOMC meetings between now and the end of the year - 19-20 September, 31 October-1 November and 12-13 December, so three opportunities for the Fed to raise interest rates again to 5.75% or higher.

What are the chances of that happening? Much will depend on where inflation is along with a host of other factors such as unemployment figures, commodity prices and other data in the CPI report for July. US inflation figures have declined in each of the last 12 months but the figures are still a way off the 2% figure which the Fed is aiming for.

Fed chairman Jerome Powell said that the mechanisms to get core inflation back to that magical figure of 2%, small quarter percentage points rises, would be used gradually over a long period of time. What has Powell said about the possibility of another rate hike in September? In last month’s press briefing, he said that it is impossible for the committee to predict when the next rate rise will occur or when rates could even start coming down.

“We are going to be assessing the need for further tightening that may be appropriate to return inflation to 2% over time,” Powell explained. “We’ll be looking at the broader picture, we’re looking for moderate growth, supply and demand through the economy coming into better balance - particularly in the labor market. We’ll be looking at inflation and we will be asking ourselves, does this whole collection of data, do we assess it as suggesting that we need to raise rates further? If we make that conclusion then we will go ahead and raise rates. That’s how we are thinking about the next meeting and meetings going forward potentially. But we are now mainly thinking about the next meeting. Between now and the September meeting, we get two more jobs reports, two more CPI reports, I think we have an ECI (Employment Cost Index) report coming later this week and lots of data on economic activity - all of that information is going to inform our decision as we go into that meeting. I would say it is certainly possible that we would raise funds again at the September meeting, if the data warranted it; and I would also say it’s possible that we would choose to hold steady at that meeting. We’re going to be making careful assessments, meeting by meeting. We have raised the Federal funds rate now by 525 basis points since March 2022, monetary policy, we believe is restrictive and is putting downward pressure on economic activity and inflation”.

He continued: “It’s really a question of how do you balance the two risks - the risk of doing too much or doing too little. We are coming to a place where there really are risks on both sides, it’s hard to say exactly whether they are in balance or not but as our stance has become more restrictive, and inflations moderates, we do increasingly face that risk. Core inflation is a better signal of where headline inflation is going because headline inflation is affected by volatile food and energy prices. Core inflation is still quite elevated and so we think we need to stay on task and we think we’re going to need to hold policy at a restrictive level for some time and we need to be prepared to raise further if we think that’s appropriate”.

Some economists are predicting another quarter percentage rate rise before the end of 2023 although the general consensus among investors is that the Fed will hold steady.

The Fed’s succession of rate rises have had a knock-on effect on average, long-term mortgage rates which hit 7.08% in late 2022 - more than double what it was two years ago. According to mortgage buyer Freddie Mac, the average rate on 15-year fixed-rate mortgages dropped from 6.30% to 6.06% in July while the average rate on 30-year home loans fell to 6.78% from 6.96%