Fed raises interest rates to the highest level in 22 years, Powell warns that there will be no rate cuts this year.

Fed raises interest rates to highest level in 22 years; Powell warns no rate cuts this year.

Compiled by: LianGuaiBitpushNews Mary Liu

On Wednesday afternoon, Eastern Time, the Federal Reserve approved a 25 basis point rate hike, the 11th rate hike in 17 months, bringing the federal benchmark borrowing cost to its highest level in 22 years.

Investors are watching for signs that this may be the last rate hike of this cycle, although policymakers have indicated at the June meeting that there will be two more rate hikes this year, the financial market has already digested the possibility that there will be no more rate hikes this year.

The S&P 500 index closed flat on Wednesday, while the tech-heavy Nasdaq index edged slightly lower. The Dow closed up for the 13th consecutive time, rising 82 points, or 0.2%, marking the longest consecutive rise since January 1987. BTC rose 0.8% in 24 hours, trading at $29,470. Ethereum rose slightly by 0.5%.

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Additional Policy Tightening

A recent survey of 106 economists by Reuters shows that most respondents expect today’s rate hike to be the last of this cycle, but the Fed’s forecast suggests otherwise.

Matt Kunke, research analyst at cryptocurrency trading firm and liquidity provider GSR, pointed out that the Federal Reserve’s Summary of Economic Projections (SEP) for June showed that the median forecast of Fed officials was for two more rate hikes this year. Kunke said, “The market has not fully accepted this view and continues to imply a higher likelihood of one rate hike (about 65%) than two rate hikes (about 27%).”

Powell said at a press conference that the central bank has not made any decisions on future rate hikes, but he made it clear that the fight against inflation is not over.

Data released by the U.S. Department of Labor showed that the year-on-year inflation rate in June was 3%, a significant drop from the peak of 9.1% in June 2022. However, the “core” inflation measure favored by the Fed – which excludes volatile food and energy costs – still rose 4.6% in May compared to the same period last year.

The post-meeting statement from the Federal Reserve says, “The Committee will consider the cumulative tightening of monetary policy, the lagged effects of monetary policy on economic activity and inflation, and economic and financial developments.”

Some Federal Reserve officials, including board member Christopher Waller and Dallas Federal Reserve Bank President Lorie Logan, believe that the cumulative effects of previous rate hikes have been incorporated into the economy. As inflation remains above the Fed’s target, they believe further rate hikes may be needed to further alleviate price pressures.

Fed Chair Powell reiterated this point at the press conference, saying that if the data shows it is necessary, there may be further rate hikes in September. He said, “We may choose to keep rates unchanged at that meeting, but as I said, we will carefully assess at each subsequent meeting.”

Unlikely to Cut Interest Rates This Year

Powell also mentioned that inflation has slowed since mid-last year, but there is still a long way to go to reach the Fed’s 2% target. He believes that the economy will achieve a soft landing and it is unlikely to cut interest rates this year.

Powell pointed out that some members of the Federal Open Market Committee (FOMC) have included interest rate cuts in their economic forecasts for next year, but he said, “This is a judgment we have to make, how confident are we that inflation will actually come down to our 2% target.”

Powell still believes that the Fed can reduce inflation without causing a sharp decline in the economy, although he said, “There is still a long way to go before certainty.”

When talking about the topic of interest rate cuts next year, Powell said that it will be a “judgment” made based on their own “confidence”.

How do professionals interpret it?

Gurpreet Gill, Global Macro Strategist at Goldman Sachs Asset Management, said on Wednesday that any new signs of inflation could mean that the Fed’s rate-hiking path will be extended. Given the uncertainty surrounding the end of this rate-hiking cycle, Gill said that if more progress is made in reducing inflation, it will limit the rise in US Treasury yields. If inflation continues to cool, the 10-year Treasury yield could even decline. However, a strong labor market and a slowing economy will potentially curb the decline in yields.

Gill said, “Today’s Fed meeting is one of the most certain and uncertain meetings in this cycle. The 0.25% rate hike has been fully digested and widely expected by forecasters and investors. However, there is still disagreement among investors as to whether this marks the end of the current tightening action.”

In a report to clients, Goldman Sachs stated that the Fed’s statement does not mean a slowdown in future rate hikes, but the bank expects a rate hike in September.

Angelo Kourfafas, Investment Strategist at Edward Jones, said, “The message conveyed to the market is that it hasn’t had any pushing effect. People are always concerned about major surprises.”

Brent Schutte, Chief Investment Officer at Northwestern Mutual Wealth Management, said that Powell’s message is clearly that the Fed will wait for economic data to make new decisions. “I don’t think the Fed will stop unless they see wage inflation decline.”

Phillip Colmar, Global Strategist at MRB LianGuairtners, said, “The market’s mispricing comes from the expectation of a significant rate cut next year. If there is anything different, it is the need for further rate hikes.”

Quincy Krosby, Chief Global Strategist at LPL Financial, said, “If the data-dependent Fed deems it necessary, this statement opens the door for another rate hike. However, the tone of the statement is more neutral rather than explicitly dovish or hawkish.”

Lex Sokolin, Managing Partner of Generative Ventures, a Web3 investment fund, said that the Federal Reserve’s statement “will not change the narrative related to cryptocurrencies. We are already in a safe-haven environment. With the Russo-Ukrainian war or a US economic recession, things may become more catastrophic, but the valuations of technology and finance are quite stable, and artificial intelligence may be an outlier.”

Sokolin expects “there will be several more rate hikes,” but “the most difficult task, which is absorbing the supply chain impact of the COVID-19 pandemic and the associated money printing subsidies, has already been completed.”

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