Federal Reserve Hikes Interest Rates to 22-Year High, But Staves off Recession Fears
July 28, 2023
The Federal Reserve increased interest rates to a 22-year record high this Wednesday, pushing forward by another 25 basis points to hit a critical rate between 5.25%-5.50%. While this hike may not provide cause for the central bank to claim an outright victory against historic inflation, it’s apparent that market patterns are adjusting, with the Consumer Price Index (CPI) falling from a peak of over 9% to a steady 3%. Despite the Federal Open Market Committee’s (FOMC) recent statement revealing little, Federal Reserve Chair Jay Powell’s subsequent press conference conveyed cautionary tones. Notably, he adjusted his language when discussing the future of the U.S. economy.
During his discussion, Powell underlined the central bank’s evolving perspective on economic growth, stating, “Our team of economists anticipates a noticeable slowdown in growth from later this year. However, given the economy’s recent resilience, they no longer predict a recession”. He assuredly suggested that the central bank could achieve its inflation target without inducing a considerable economic downturn that could result in substantial job losses, as previously seen. He expanded, “At present, the Federal Funds Rate is at a restrictive level. If we witness a credible and sustainable decrease in inflation, we won’t need to maintain this level of restriction…We would stop the rate hikes well before we attain 2% inflation, and initiate rate cuts prior to hitting 2% inflation”.
Subsequent to the rate hike, the Dow Jones Industrial Average (DJI) registered its 13th consecutive gain – its largest winning streak since the 1980s. If it closes higher today, it will establish the longest positive run since 1897. Moreover, the latest US GDP figures for Q2 will be released at 8:30 AM ET. Economists forecast the growth rate to have descended to an annualized 1.5%, a stark contrast to the 2.0% growth rate in Q1. However, this anticipated deceleration is notably more favourable than numerous initial predictions of a severe recession by mid-2023.
In a recent article on Invesco NASDAQ 100 ETF (QQQM), analyst Komal Sarwar commented, “The Fed seems to be aiming for a soft landing”. He further highlighted the robust economic fundamentals, corporate outlook, and investor sentiment backing the current bull market. He pointed out that sectors like technology, consumer cyclical, and communications are demonstrating remarkably strong performance. According to FactSet data, “The S&P 500 (SP500) has risen by approximately 4% since the earnings season began almost two weeks ago, with 75% of companies exceeding expectations.”