After a brief pause on interest rate hikes in June, the Federal Reserve took decisive action once again, aligning with market expectationsOn July 26, during a meeting of the Federal Open Market Committee (FOMC), the Federal Reserve announced an increase in the federal funds rate by 25 basis points, raising it to a target range of 5.25% to 5.5%. This marks the highest level in 22 years and is the 11th rate hike since March of the previous year.

Jerome Powell, the chair of the Federal Reserve, indicated that while inflation in the U.Shas shown signs of easing since mid-last year, it remains significantly above the targeted 2% levelThe path of future hikes will be determined by incoming data, with the central bank committed to making incremental decisions at each meeting.

He emphasized that there will be no cuts to interest rates this year

Additionally, the Federal Reserve no longer anticipates a recession in the U.Seconomy.

Following the announcement, the Dow Jones Industrial Average surged mid-session, ultimately closing up 82.05 points or 0.23% at 35,520.12 points, setting a record for the longest consecutive gains since 1987. However, the S&P 500 index dipped slightly by 0.71 points, or 0.02%, to settle at 4,566.75 points, while the Nasdaq fell by 17.27 points, or 0.12%, finishing at 14,127.28 pointsThe dollar weakened further, dropping below the 101 mark.

CNBC reported that traders have already factored in the impact of the Federal Reserve's interest rate hike.

The FOMC voted unanimously in favor of this decision.

In fact, this increase was in line with market forecasts, and the primary focus has shifted to whether July marks the last rate hike from the Federal Reserve.

Powell pointed out that the Federal Reserve has not made any decisions regarding future actions; if supporting data materializes, another rate hike could occur in September

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“There are eight weeks until the September FOMC meeting, and we will continue monitoring all relevant data until thenWe do not wish to provide forward guidance,” he stated.

He believes that there will be no cuts in rates this year, as the decision hinges on confidence in inflation returning to its target levelHowever, some FOMC members anticipate reductions in rates next year.

Notably, Powell also stated that differing opinions existed during this meeting, which would be reflected in the minutes released later.

Recently released inflation data showed a cooling trend, with the Consumer Price Index (CPI) increasing by 3% year-over-year and 0.2% month-over-month in June, compared to increases of 4% and 0.1% in May respectively

Moreover, when volatile food and energy prices are excluded, the core CPI increased by 4.8% year-over-year and by 0.2% month-over-month.

Powell found the slowdown in June’s CPI encouraging, acknowledging that inflation had been alleviated to some extent, but there remains a significant distance to cover before reaching the 2% targetHe noted that inflation has proven to be more resilient than anticipated, with core inflation remaining elevated.

The Federal Reserve expects it may take until around 2025 for inflation to return to the 2% policy target level, and that rate hikes can be paused before achieving that target.

According to Xie Xiao, a senior economist from Swiss wealth management firm Pictet, the annual Jackson Hole Economic Symposium will take place in late August, and prior to the September FOMC meeting, two employment and inflation reports will be released, providing further information on monetary policy prospects

“The July rate hike could mark the last of the current cycleHowever, hawkish tendencies remain, as a resurgence in inflation and robust labor market data could prompt another hike, possibly in November, rather than SeptemberWe do not expect rate reductions until at least 2024.”

Journalists known as the “new Federal Reserve correspondents” noted that divisions within the Fed persist: some officials are inclined to hike rates again in September, while others believe the effects of previous hikes have not been fully realized and prefer to wait until November or December to decide on the next increase.

Frances Donald, global chief economist at Manulife Investment Management, asserts that the Federal Reserve's stance is firmly hawkish for the long term

Based on current assumptions, the next step may well be a rate cut, but that might not happen until 2024. Nevertheless, Powell has no choice but to continue cautioning the market about potential rate hikes to avoid fostering premature expectations of cuts and reigniting inflation worries.

In terms of economic forecasts, Bloomberg Economics anticipates that the Federal Reserve will keep rates steady after the July hike, then start cutting rates from the second quarter of 2024. However, potential negative supply shocks could reverse inflation trends, possibly prompting the Fed to resume hikes before the end of 2024. Major risks include widespread labor strikes and weather-induced spikes in global food pricesFor now, the trajectory of interest rates is characterized as a “long pause in hikes” following July, with a low probability of the Fed renewing its rate increases.

Considering that recent economic data seems to enhance the likelihood of a soft landing, the FOMC is unlikely to take any significant action to alter the current situation.

Latest data from the Federal Reserve's interest rate futures reflect a market expectation of a 42% chance of one more rate hike in this cycle, with a 21.5% probability for a 25 basis point increase in September

By May of the following year, at least one 25 basis point cut is anticipated.

The Federal Reserve's policy statement indicates that economic activity is expanding at a moderate paceJob growth is robust, and the unemployment rate remains low.

Powell remarked that U.Seconomic activity is expanding moderately, with consumer spending experiencing slower growth compared to earlier in the yearThe Fed's assessment of economic activity has improved compared to its previous characterization in June as “moderate.”

He noted that Federal Reserve officials no longer predict a recession for the U.S

economy, with expectations that a targeted inflation rate of 2% can be achieved without a significant increase in the unemployment rate.

According to data released by the U.SDepartment of Labor on the 7th, the economy added 209,000 jobs in June, with the unemployment rate at 3.6%, a decline of 0.1 percentage points month-over-monthData indicates that the average monthly job additions in the non-farm sector during the first half of 2023 were 278,000, down from 399,000 in 2022.

Powell believes there are increasing signs of a balance between labor supply and demandHe asserted that the labor market in the U.Sremains exceptionally tight, with robust job growth continuing and demand for labor far exceeding supply, suggesting that labor market conditions need further relaxation.

He reiterated that achieving a reduction in inflation to a certain degree without triggering a surge in unemployment, often referred to as a “soft landing,” is the ideal outcome.

Regarding the banking sector, Powell indicated that it has stabilized, adding that the Federal Reserve is carefully monitoring the situation, finding it challenging to evaluate the impact of the turmoil on the economy.