After a brief pause in its interest rate hike campaign, the Federal Reserve (the Fed) raised rates by a quarter of a percentage point (25 basis points) on July 26, 2023. This widely expected move brings the Federal Funds Rate to a 22-year high. The question now is if this increase might be the last. Based on remarks by Chairman Powell, the answer is uncertain.
Despite the drop in inflation in June, Powell acknowledged that inflation has proven more resilient than expected and said the Fed might make further rate decisions based on the Consumer Price Index, unemployment rate, and other data. And while there are data points to consider in the seven weeks before the Fed's next meeting, Powell made it clear that another hike is on the table in September, saying, "We are strongly committed to bringing inflation back to our 2% goal."
The Fed is walking a fine line between its dual mandates of price stability and maximum sustainable employment. By raising rates to continue cooling inflation, the concern is that it may overshoot and push the economy into a recession that would cause higher unemployment. However, most top economists have reversed their forecasts and now think the Fed might get it right and orchestrate a "soft landing," where inflation comes down to acceptable levels without triggering a recession.
Whether this is the last rate hike for the cycle or there are a few more spread out over the rest of the remainder of the year, all indications point to us being close to peak interest rates. And as history has shown, when the Fed stops hiking rates, equities typically perform well. Of course, we all know that past performance does not guarantee future results. Without having a crystal ball, we cannot predict, but we can plan!
As always, if you have any questions, we're just a phone call or email away.
Charles D. Dodds, Jr., CFP®, CLU®, ChFC®, CIMA®
President, Sr. Portfolio Manager
Adrian F. Dodds, CFP®
Managing Partner, Sr. Financial Advisor