Measured Hawkishness as Fed Hikes Rates in July


The Federal Reserve’s monetary policy committee increased the federal funds rate to a top target of 5.5% at the conclusion of its July meeting this week. The Fed will also continue to reduce its balance sheet holdings of Treasuries and mortgage-backed securities as part of quantitative tightening. These actions are intended to slow the economy and bring inflation back to 2%.

After a June pause, the July increase is consistent with a measured hawkishness for the central bank.

The Fed indicated: “In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

This suggests a bias toward additional tightening but under a data-dependent approach with respect to future inflation reports.

The Fed faces competing risks: elevated but trending lower inflation combined with ongoing risks to the banking system and macroeconomic slowing. Chair Powell has previously noted that near-term uncertainty is high due to these risks. Nonetheless, economic data is solid. 

The Fed stated on Wednesday: “…economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient.”

Looking forward by looking back, the Fed’s June projections indicated perhaps two more rate hikes were in store in the coming months. One happened here in July. It seems reasonable under a “measured hawkish” approach, a skip could happen in September and a final rate hike at the end of October. Or a final rate hike in September could occur with no skip if additional progress is not made on CPI in the next report.

NAHB Chief Economist Rob Dietz provides additional analysis in this Eye on Housing blog post.

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