The Fed hikes interest rates by a quarter point and hints at another increase this year

Originally Published: 26 JUL 23 08:10 ET

Updated: 26 JUL 23 14:52 ET

By Bryan Mena, CNN

Washington, DC (CNN) — The Federal Reserve raised its benchmark lending rate by a quarter point Wednesday, lifting interest rates to their highest level in 22 years.

It’s the 11th rate increase since the Fed began its inflation fight in March 2022, and comes just one month after the central bank hit pause in order to assess the state of the economy after the failures of three regional banks since the spring.

Fed officials are estimating one more rate hike this year, according to their latest set of projections. Inflation’s steady slowdown in recent months has been encouraging for American consumers and businesses, but officials reiterated in their post-meeting statement that “inflation remains elevated” and that the Fed “remains highly attentive to inflation risks,” suggesting that another rate hike remains on the table.

“In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the Fed’s statement said.

Inflation is still the No. 1 focus

The Fed’s preferred inflation gauge — the Personal Consumption Expenditures price index — rose 3.8% in May from a year earlier, down from the prior month’s 4.3%. Meanwhile, the core measure inched down to 4.6% from 4.7% during the same period, which was still its lowest level since October 2021. The Commerce Department releases June figures on Friday.

Officials want to retain the option of another rate hike in case inflation proves to be more resilient than expected, but the timing of that final hike is still a question mark. It’s possible that a second hike never comes and the Fed decides to move on to the next phase of its inflation fight, which would be to hold rates steady until inflation is defeated.

Investors are bullish about the end of rate hikes and the Fed’s chances of pulling off a soft landing, a scenario in which inflation slides to the 2% target without the economy sharply deteriorating. But Fed officials have underscored that they will be data dependent and make decisions on a meeting-by-meeting basis. Fed Chair Jerome Powell’s remarks at the Jackson Hole annual economics symposium next month could shed more light on what to expect in September.

The labor market remains robust

The Fed is highly attentive to the state of the job market, and whether it is coming into better balance. There are some signs that it has. Job openings are down from their peak last year, the rate of quitting has slowed to near pre-pandemic levels, and the share of prime-age workers (those between ages 25 and 54) is at its highest level since 2002.

Inflation has cooled without a sharp uptick in the unemployment rate, but it remains to be seen whether that could continue. Research suggests the Fed has no choice but to slow the economy further because of the tight labor market’s persistent role in pushing up consumer prices, which could result in an economic slump.

The importance of wage growth

Officials are closely watching wage growth figures because of the role that labor costs play in pushing up prices. Higher labor costs loom large for labor-intensive services businesses such as restaurants and hospitals, and the Fed’s remedy to that is to take some demand out of the economy through rate hikes. It could take at least a year for the effect of rate hikes to filter through to the broader, real economy, according to some research, and it’s already been more than a year since the Fed began lifting rates.

Data reflecting a strong economy might just give the Fed enough leeway to do another hike, according to economists. The Commerce Department releases its first estimate of second-quarter gross domestic product Thursday, and it’s expected to show that economic growth held up as consumer spending slowed sharply.

Fed Chair Jerome Powell is set to hold a press conference at 2:30 p.m. ET Wednesday.

This story is developing and will be updated.

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