Fed Raises Rates to Highest Point Since 2001; Here's What CU Economists Are Saying

WASHINGTON—Emphasizing it remains “highly attentive to inflation risks,” the Federal Resoerve has moved to hike interest rates by 25 basis points, setting the target range for federal funds at 5.25 to 5.5%--their highest level since 2001.

The Federal Open Market Committee made the announcement Wednesday at the close of its July two-day meeting here, and suggested it may not yet be done with rate increases.

“Recent indicators suggest that economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated,” the Fed stated in a release.

Tighter Conditions

“Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run,” the Fed stated.

The FOMC emphasized it will continue to assess additional information and its implications for monetary policy.

“In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments," the FOMC said. "In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2% objective."

NAFCU: Still 'Wary'

NAFCU said the Fed's decision suggests the Committee is still wary of declaring mission accomplished on inflation, despite recent economic data indicating long-awaited improvements.

"By assuming a cautious approach in its forward guidance, the committee reaffirmed its belief that the economy remains capable of withstanding pressure from rising interest rates, and its preference to leave the door open for ‘additional policy firming’ if the rise in real rates is insufficient to tackle inflation. NAFCU anticipates the August break between meetings will be critical for confirming a consistent erosion in inflation, and will offer indications of how long the committee chooses to maintain its present terminal rate," stated NAFCU economist Noah Yosif.

CUNA: 'Not Done Yet'

"Headline inflation eased to 3% last month but the FOMC believes getting it back down to 2% target is not done yet. Core inflation, which excludes volatile food and energy prices and is indicative of future prices, is 4.8%," said CUNA Senior Economist Dawit Kebede. “Recent economic indicators show that things are going in the right direction to bring prices down. Job gains are cooling, wages are moderating, and labor demand and supply are in a better balance. However, the Federal Reserve believes it needs to see more data in the coming months continuing this trend before they decide to hold rates steady or raise more. 

“Current interest rates are already restrictive and credit conditions are tight for businesses and households. Since monetary policy impacts economic activity with a lag, it is more appropriate to wait and see as factors causing inflation are easing," Kebede continued. "Additional rate hikes reduce the probability of a soft landing where prices come down to target without causing economic pain.”