Volkswacht Bodensee - US Fed lifts rates to highest since 2001 and hints at more to come

"Policy has not been restrictive enough for long enough to have its full desired effects," Fed Chair Jerome Powell told reporters after the decision to lift interest rates by a quarter percentage-point was announced.

"So we intend, again, to keep policy restrictive until we're confident that inflation is coming down sustainably toward our two percent target -- and we're prepared to further tighten if that is appropriate," he added.

The increase, after a brief pause in June, brings the Fed's key lending rate to a range between 5.25 percent and 5.5 percent.

In a statement, the US central bank said it will "continue to assess additional information and its implications for monetary policy," looking at a range of data points "in determining the extent of additional policy firming."

This indicates that officials see the possibility of more monetary tightening ahead.

"We're going to be going meeting by meeting," Powell said.

- 'Long way to go' -

At the previous meeting of the rate-setting Federal Open Market Committee (FOMC) in June, the median forecast was for two additional rate hikes this year.

The latest quarter percentage-point rise, which was in line with analysts' expectations, is the Fed's 11th since it began an aggressive campaign of monetary tightening in March 2022 in response to rising prices.

Although inflation has continued to fall since the decision in June to pause rate hikes, it remains above target -- suggesting more policy action may be needed.

"Inflation has moderated somewhat since the middle of last year," Powell said on Wednesday, adding that the "process of getting inflation back down to two percent has a long way to go."

Meanwhile, unemployment has remained close to historic lows and economic growth for the first quarter was revised up sharply on resilient consumer spending data.

"The Fed will stand its ground and hold rates high well into 2024, barring a more pronounced slowdown in the economy and rise in unemployment," KPMG US's chief economist Diane Swonk wrote in a note published shortly after the Fed decision on Wednesday.

"The goal is to defeat, not just cool, inflation," she said, adding that KPMG expects another rate hike in November, "given the time needed to assess how rapidly the economy is actually cooling and the risk of noise due to strikes."

- Soft landing -

Recent positive economic news has increased the chances of a so-called "soft landing," in which the Fed succeeds in bringing down inflation by raising interest rates while avoiding a recession and a surge in joblessness.

On Wednesday, Powell reiterated that he felt a soft landing remains possible.

"It has been my view consistently that we do have a shot," he said. "That's been my view, that's still my view."

Powell also told reporters that his staff's expectations for a recession to start later this year has diminished.

"The staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession," he added.

"This is quite the pivot in a month," Oxford Economics' chief US economist Ryan Sweet wrote in a note to clients regarding the Fed staff's updated outlook.

While investors had more or less priced in a hike on Wednesday, they have been less confident about the chances of another increase at the next Fed meeting in September.

Futures traders currently assign a probability of just over 20 percent that the FOMC will raise rates again in September, according to CME Group.

M.Ouellet--BTB