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Federal Reserve's No-Shock Rate Hike Draws Mixed Reactions From Economists: What The Fed's Next Move?

Published 26/07/2023, 22:21
© Reuters.  Federal Reserve's No-Shock Rate Hike Draws Mixed Reactions From Economists: What The Fed's Next Move?

Benzinga - In a move that came as no surprise on Wednesday, the Federal Reserve raised the federal funds rate by 25 basis points to a range of 5.25%-5.5%, marking the highest borrowing cost level since February 2001.

Following a short hiatus in June, the rate hike resumed, accumulating a total increase of 5.25% since the beginning of the tightening cycle in March 2022. More on the rate hike here.

Quincy Krosby, Chief Global Strategist for LPL Financial commented on the immediate market reaction following the Fed’s decision, noting the policy-sensitive two-year Treasury note inching lower, while the economy-sensitive Russell 2000 edged higher.

The Fed’s statement left the door open for another rate hike if deemed necessary, Krosby said. Despite the open door, the tone of the Fed's statement remained neutral, with no lean towards either a dovish or hawkish stance.

Krosby added, “It’s clear that the Fed will raise rates again if the core rate of inflation doesn’t edge lower at a faster pace, even if the ‘stickiness’ has begun to untangle.”

Joe Brusuelas, Principal & Chief Economist at RSM U.S., on the other hand, voiced a different opinion, saying that the July rate hike is the final increase in a two-year effort to restore price stability.

Brusuelas explained that with the policy rate currently standing above the 3.9% core PCE policy variable and the 4.6% services ex-housing metric that the central bank follows closely, it is time for the Fed to allow the economy an extended period to absorb the impact of past rate hikes.

Brusuelas also noted risks linked to food, oil, and energy costs, which will be driven by exogenous factors out of the Fed's control.

However, with hiring, demand for services, and transportation costs cooling, he believes a 5.5% terminal rate is appropriately restrictive to push inflation back towards tolerable levels, which aligns with 2.5% to 3% over the next two years.

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Bill Adams, Chief Economist for Comerica Bank said the Fed executed the quarter percentage point rate hike as expected and held other aspects of its monetary stance steady. Adams said that the Fed is likely to skip seriously considering a rate hike at its next decision in September, setting up the November 1 decision as the next time there is a significant possibility of a hike.

With core inflation expected to slow down between now and then, Adams anticipates that the Fed will probably refrain from further rate hikes, noting that rates have likely peaked for this cycle.

Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance pointed out that Wednesday’s Fed meeting gave both the Bulls and Bears points to argue.

He suggested that, much like Fed Chair Jerome Powell thinks the “risks are balanced” between raising rates too much and not raising rates high enough, the risks to equity investors are also in balance. In Zaccarelli's opinion, the best course of action would be to stay fully invested, but diversified and not overly concentrated in risky equities or risky bonds.

Lawrence Yun, Chief Economist at the National Association of Realtors (NAR) said the fed funds rate now stands 2% higher than inflation, marking a rare and exceptionally tight monetary policy condition.

The chief economist noted that the Fed is still using language based on the lagging indicators of “robust” jobs and “elevated” inflation.

Yun pointed out that the impact of increased interest rates is already visible, as demonstrated by a decline in home sales. More to that, businesses are scaling back on investments, and community banks are under noticeable stress.

Read next: WATCH: Mitch McConnell Freezes During Press Conference, Taken Away By Republican Colleagues

Photo: Shutterstock

© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

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