US Fed Hikes Rates By 25 Bps, Keeps Options Open For Further Hikes In Future

The Federal Reserve increased the interest rates by 0.25 per cent on Wednesday, explaining that the reason behind this decision was the ongoing high inflation. This move has led to the current highest policy rate by the US central bank in 16 years.  

It was the 11th rate hike in the last 12 meetings held by the Fed. As a result, the benchmark overnight interest rate now lies within the range of 5.25 per cent to 5.50 per cent. The accompanying policy statement indicated the possibility of another rate increase in the future. 

"The (Federal Open Market) Committee will continue to assess additional information and its implications for monetary policy," the Fed said, similar to its June statement. The central bank kept its policy options undecided while it seeks a suitable point to conclude the current cycle of tightening measures. 

As stated in June, the Federal Reserve mentioned that it would closely monitor incoming data and assess the impact of its rate hikes on the economy to determine the extent of additional tightening measures required to achieve its two per cent inflation target. 

Despite weaker-than-expected inflation data following the June meeting, policymakers have been hesitant to change their hawkish approach until more progress is made in reducing price pressures. Key indicators of inflation still remain more than double the Fed's target, and despite the rapid increase in interest rates, the economy continues to perform better than anticipated, with a low unemployment rate of 3.6 per cent. 

The job market remains strong, and the economy is described as growing at a "moderate" pace, an upgrade from the "modest" pace observed during the June meeting. Economists polled by Reuters expect the U.S. government to report a 1.8 per cent annual growth rate for the second quarter. 

However, with approximately eight weeks until the next Fed meeting, which is a longer interval than usual, if the pace of price increases continues to moderate, this rate hike might be the last in a series that began with a cautious 0.25 per cent increase in March 2022 before accelerating into the most rapid monetary tightening since the 1980s. 

In the latest economic projections from Fed policymakers, 12 out of 18 officials anticipated at least one more 0.25 per cent increase would be necessary by the end of this year. 

Commenting on the rate hike, Suman Bannerjee, CIO of Hedonova, a US based Hedge Fund stated, “The 0.25 per cent rate hike is justified for four reasons. First, it aligns with the Fed's commitment to progressively increase rates until September 2023, maintaining global economic leadership's predictability. Second, the growing US economy can tolerate rate hikes without severe damage. Third, despite a current inflation rate of three per cent, the goal is to reach a two per cent target; the projected moderate GDP growth and a rate hike in September suggest this is achievable. Lastly, 2022's cheap credit, stemming from COVID-induced money printing, caused an excess of borrowed liquidity, leading to high debt levels. Surprisingly, raising rates can induce austerity, drain excess liquidity, reduce spending, and direct credit towards the most profitable ventures, further taming inflation. I anticipate two additional 0.25 basis point hikes in September and December before a likely decrease.” 

Rohit Arora, CEO and Co-founder of Biz2Credit and Biz2X, commented on the implications of the fed hike on the Indian economy, "In line with earlier projections, the 25 bps interest rate hike, carries substantial implications for the Indian economy. As inflation persists and US interest rates continue to climb, India may opt to maintain its current rates. The potential risk of a US recession could adversely affect our exports, while the rising oil prices present additional challenges. Although favourable monsoons bring hope for local agriculture, it is essential to remain vigilant, as the Rupee may encounter pressures from soaring oil prices and a potential export slowdown. Moreover, foreign investments could be influenced by the Federal Reserve's future outlook. With the imminent interest rate increase by the Fed, the global community remains cautious about the lingering impact of inflation."