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Federal Reserve raises interest rates to a 22-year high

Posted by Nathan McCullum on 27/07/2023

The US Federal Reserve has raised interest rates by a quarter of a percentage point, taking rates to a 22-year high.

Overnight, the Fed announced rates would rise to a range of 5.25% to 5.5% to continue its fight against inflation.

Fed chair Jerome Powell said the committee remains “squarely focused” on its dual mandate to promote maximum employment and stable prices for the American people.

“We understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2% goal,” he said.

“Price stability is the responsibility of the Federal Reserve. Without price stability, the economy doesn’t work for anyone. In particular, without price stability we will not achieve a sustained period of strong labour market conditions that benefit all.”

Starting from early last year, the Federal Open Market Committee (FOMC) has maintained a firm approach towards tightening monetary policy, making the latest hike the 11th out of the 12 meetings held.

“We have covered a lot of ground, and the full effects of our tightening have yet to be felt,” Powell said.

He reinforced the Fed is taking a data-dependent approach in determining the extent of additional policy firming that may be appropriate.

According to Powell, growth in consumer spending appeared to have slowed from earlier in the year but the labour market remained very tight.

“Over the past three months, job gains averaged 244,000 jobs per month, a pace below that seen earlier in the year but still a strong pace. The unemployment rate remains low, at 3.6%,” he said.

He further noted that rent indicators suggest economic activity has been expanding at a moderate pace. While housing activity in the sector has picked up but remained well below prior years, reflecting higher mortgage rates.

Like the sentiment shared by the Reserve Bank of Australia (RBA), Powell said inflation remains well above the Fed’s long-term target goal.

“Over the 12 months ending in May, total PCE prices rose 3.8%, excluding the volatile food and energy categories, core PCE prices rose 4.6%,” he explained.

He further mentioned that in June, the 12-month change in the Consumer Price Index (CPI) was recorded at 3.0%, and the change in the core CPI stood at 4.8%.

“Inflation has moderated somewhat since the middle of last year. Nonetheless, the process of getting inflation back down to 2% has a long way to go,” he said.

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