Central Banks update: Fed increases policy rate and sticks to data dependent approach

Tuesday 01 August 2023

August 2023 | 2 minute read    

   

Central banks update: Fed increases policy rate and sticks to data dependent approach.

Fed increases policy rate and sticks to data dependent approach. As expected by market participants, the Federal Reserve (Fed) announced an increase of the Fed Funds rate by 25 basis points on 26 July. Having being notched to a range of 5.25 - 5.50%, it has now reached a 22-year high.

In the press conference, the Chair hit a balanced tone and did not commit to hikes. While Mr Powell did not explicitly mention the next moves, the dot plot would suggest that further tightening may come during the upcoming meetings. However, the Fed’s approach remains data dependent.

Inflation remains above the US central bank target. Mr Powell expressed the Fed’s concern about the fact that inflation is still high, and this might lead to further monetary tightening if necessary.

The Fed acknowledged that a tighter monetary policy stance could affect economic activity. In terms of growth, the US real GDP increased at an annualised 2.4%, above the 2% expected by market participants. Due to the strong domestic demand, the Core Personal Consumption spending (PCE) would have been expected to remain elevated, but instead was below consensus estimates at 3.8% for Q2.

Financial markets are overall skeptical about further increases of the Fed funds rate, and the immediate reaction was rather muted. Benchmark fed funds futures priced in less than a 48% chance of a hike in November.

Source: Amundi Institute, Fed moving to a pause with a very data dependent approach, 28 July 2023

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Date of first use: 31 July 2023
Doc ID: 3031132