July 2023 Fed Meeting: Interest Rate Hikes Resume | J.P. Morgan (2024)

After putting rate hikes on pause at their June meeting, the central bank bumped up interest rates by 25 basis points in July. Following a series of rate increases that now total eleven, the target policy rate is currently a lofty 5.25%–5.5% – the highest it’s been in 22 years.

At the last Federal Open Market Committee (FOMC) meeting on June 13–14, the committee decided to leave rates unchanged.¹ Since then, data revealed ongoing strength in the labor market serving as a headwind to central bank efforts to curb inflation. In July, the Bureau of Labor Statistics reported 209,000 new jobs were added. At the same time unemployment ticked down a notch, coming in at 3.6% vs. 3.7% in May. This distinguishes the current period as the longest period of below 4% unemployment since the 1960s.²

Although hiring has slowed, wage growth continues to raise inflationary concerns. In May, job openings fell by 496,000 from April to 9.8 million, well below the 11.5 million peak reached in March 2022.³ Over the last three months job gains averaged 244,000, representing a decline from earlier in 2023 but remaining robust.⁴

Meanwhile, wages grew by 4.4% compared to the prior year as demand for workers exceeds supply.⁵

Future rate hikes still on the table

Today’s quarter point increase was widely expected. The question now is whether the Fed will hike rates once again at its next meeting in September. Federal Reserve Chair Jerome Powell said that between now and then there will be plenty of data to inform the decision, including two jobs reports and two inflation reports. In terms of achieving their primary goal of price stability, Powell stated there is “a long way to go.” That said, he acknowledged the lags in economic responses to policy changes and stated that “the full effects of our tightening have yet to be felt.”

Shawn Snyder, Global Investment Strategist at J.P.Morgan, noted Powell’s narrative of a tight labor market and the potential of another rate hike at the Fed’s September meeting.

“The overarching narrative from Chair Powell seems to be that the labor market remains tight and the central bank would like to see further softening. We think this leaves the door open for additional rate hikes, but Chair Powell was also quick to suggest that holding rates steady at their September meeting was as likely as another rate hike,” said Snyder.

Snyder also mentioned that, while the Fed’s mission may not yet be accomplished, they seem ever closer to the terminal rate, which is the final, restrictive rate that they will attempt to hold steady heading into 2024.

“Interestingly, Chair Powell stated that the central bank had both covered a lot of ground, but also had a long ways to go in the fight against inflation. This seems to be a vague declaration that the mission has not yet been accomplished and that it is too early to declare victory. That said, their rate hiking campaign seems very likely to occur by year end,” said Snyder.

Waning recession fears

The tight labor market has been a headwind to the effectiveness of Fed policy actions. Factors that have helped ease concerns of a hard landing include an improved labor force participation rate, particularly in the age 25–54 segment.⁶ To some extent, this has helped to offset the impact of those who have permanently left the workforce, which has been notable in the 55+ age group.⁷ While Powell reiterated a desire to see broad cooling in the labor market, he anticipates that inflation can be moderated without a large number of job losses.

In addition, an easing of supply chain constraints and softening consumer demand are helping to moderate inflation. In June, inflation came in at 3% for the trailing year.

Powell once again stressed that the committee wants to see inflation come in “credibly” and “sustainably” down. However, he also suggested the FOMC will stop raising rates “long before” they reach 2% as an overly restrictive policy for too long could adversely affect the economy. He expects the central bank is unlikely to reach its 2% target until 2025.

Snyder also commented on the housing sector relative to the Consumer Price Index (CPI) and the Fed’s policy and how Powell seems more focused on the labor markets.

“We found it encouraging that the Fed chair did not seem to be overly worried about the incipient rebound in the housing sector,” said Snyder.

“With shelter prices being such a large component of the consumer price index, he could have easily signaled that the rebound may lead to even more rate hikes ahead, but instead he seemed solely focused on the labor market and appeared hopeful that the rate hikes already put in place may be restrictive enough to accomplish their goals.”

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