The Federal Reserve of the United States increased its benchmark overnight interest rates by a quarter percentage (.25%). This is the 11th rate hike in the previous 12 meetings of the Federal Reserve. The hike has set the benchmark overnight interest rates in the range of 5.25% – 5.50%. It is worthwhile noting that this level was seen just before the housing market crash in the year 2007. The decision led to a modest increase in 2 and 10 years bond yield
This is the highest level in the last 22 years. “Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller,” said FOMC statement
Reason for the hike
The main reason for the hike is to curb the inflation. According to the Federal Reserve the inflation has gradually decreased which is a good sign for American Businesses and consumers. Still inflation is beyond the target of 2%. Consumer prices increased over 3.0% in June 2024.
Since the previous meeting the inflation data has been encouraging. Though. the Fed has been reluctant to change its hawkish view due to the gravity of inflation and its effect on the economy.
Experts suggest that there may be one more hike this year.
Fed chairman Jerome Powell categorically stated that future actions of the Fed will depend on the inflationary and growth data. The decision would be made on a meeting-to-meeting basis.
In his statement, he said “It is certainly possible that we would raise the (federal) funds rate again at the September meeting if the data warranted, and I would also say it’s possible that we would choose to hold steady at that meeting”He made it clear not to expect very early easing in interest rate.
The job market is stronger than expected with the unemployment rate being just 3.6%. According to the Fed the economy is growing at a ‘moderate’ pace. This is a slight upgrade from the ‘modest’ stated by Fed in June.
Meanwhile, the US government is expected to report quarter 2 economy numbers on Thursday. Experts suggest growth of 1.8% this quarter.
What are overnight rates?
Overnight rates are defined as the rates at which a depository institution (generally banks) lends or borrows funds from another similar institution. The rates are generally the lowest available in the market as they are used by creditworthy institutions. These are used as instruments by the central banks to curb inflation.
