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United States Monetary Policy July 2022

United States: Fed hikes aggressively by 75 basis points in July

At its meeting on 26–27 July, the Federal Open Market Committee (FOMC) decided to raise the target range for the federal funds rate by 75 basis points to 2.25–2.50%—the second successive 75 basis-point hike. The Fed also stated that it would continue reducing the size of its balance sheet.

The decision to hike was aimed at driving down inflation, which has been running at over four times the Central Bank’s 2.0% target in recent months due to external price pressures and the red-hot domestic labor market.

Looking forward, the Fed reiterated that “ongoing increases in the target range will be appropriate”. The Consensus is for slightly over 100 basis points of additional tightening by end-2022, although forecast range from 50 to 150 basis points. If inflation maintains the downward trend observed in July, this would likely lead the Fed to slow the pace of its rate hikes in the months ahead.

On the outlook, the EIU said:

“We maintain our view that the Fed will raise its benchmark rate by a further 100 basis points between September and March 2023, bringing the fed funds rate to a peak range of 3.25-3.50%. We expect the Fed to revert to 25-basis-point rate rises from now on, assuming that inflation starts to stabilise by September and economic activity continues to slow.”

Analysts at Commerzbank are more hawkish:

“The labor market is running hot. We continue to expect the Fed to raise its key rate to 4.0% by the end of the year.”

The next FOMC meeting is scheduled for 20–21 September.

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