US Fed Minutes: More US interest rate hikes ahead?
Stock market indexes over the world dropped after the US central bank’s June meeting minutes raised fears of more interest rate hikes ahead!
The Federal Reserve decided to keep interest rates unchanged at the June meeting. This was a unanimous decision, with the majority of participants believing that further rate hikes would be needed in the future. However, the Fed wanted to take a step back and assess the situation before making any further changes.
While some interest rate setters demanded interest rate hikes in June itself, chairman Powell left rates unchanged, but also paved the way for atleast two more rate hikes this year as inflation in the US is still away from its 2% target.
The Fed's decision to hold rates steady is a sign that they are taking a cautious approach to monetary policy. This is understandable, given the current economic uncertainty. However, it also means that inflation could continue to be a problem in the near future.
According to data from Refinitiv, traders continue to expect a rate hike in July and about a one-in-three chance of another increase before the end of the year.
US Fed Minutes: Historical US interest rates
| Meeting Date | Decision | Interest Rate Range |
|---|---|---|
| May 2022 | +0.5% | 0.75-1% |
| June 2022 | +0.75% | 1.50-1.75% |
| July 2022 | +0.75% | 2.25-2.5% |
| September 2022 | +0.75% | 3-3.25% |
| November 2022 | +0.75% | 3.75-4% |
| December 2022 | +0.50% | 4.25-4.5% |
| January 2023 | +0.25% | 4.5-4.75% |
| March 2023 | +0.25% | 4.75-5% |
| May 2023 | +0.25% | 5-5.25% |
| June 2023 | Unchanged | 5-5.25% |
US Interest Rates: Link between inflation and interest rates
Inflation in the US and across the world has been running rampant ever since the end of the coronavirus pandemic. The current inflation rate in the US languishes around the 4% level, which by global standard is still not too alarming, however it still sits well above the 2% inflation target set by the US central bank.
The central bank regulates inflation in the country through a series of tools like interest rates, open market operations, bond buying and selling and much more.
US Fed Minutes: Key factors affecting US interest rate decisions
Labor Market
The US labor market is the key area which directly influences the US central bank. The bank at all times aims to fulfill two criteria - lower cost pressures and maximum employment.
Whenever the labor market is flush with openings and unemployment is low, there is generally higher spending capacity in the hands of the people which leads to a rise in demand and subsequent higher prices.
Inflation
Controlling inflation at the right level to ensure manageable price pressures is the key area of focus for any central bank. Higher inflation adds on the pressures of a recession while too low inflation lands the risk of pushing the economy into a deflationary phase which is even more damaging than a recession.
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