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Market Update

FOMC increases rates by 25 bps to 525–550 bps range, reflecting 22-year high

July 26, 2023


On Wednesday, July 26, 2023, the Federal Open Market Committee (FOMC) voted unanimously to raise the fed funds rate to a target range of 5.25%–5.50%. Following a pause in rate hikes at the prior meeting, this increase elevates the fed funds target to its highest level since 2001 and was consistent with market expectations. The FOMC statement included few changes compared to the prior statement, reflecting the Committee’s view that the labor market has been “robust” while inflation “remains elevated.” The statement neither rules out future rate hikes nor implies near-term cuts, stating that the Committee will be “prepared to adjust the stance of monetary policy as appropriate.”

Source: Federal Reserve Bank of St. Louis

Impact on rates

In his first remarks during the press conference following the statement, Chair Jerome Powell reiterated the narrative of the FOMC statement by declaring his FOMC colleagues “haven't made any decisions about any future meetings including the pace at which we consider hiking.” Powell provided minimal forward guidance, but indicated to the press that he does not expect rate cuts until 2024 and expects inflation to move to the FOMC’s 2% target, “without the kind of really significant downturn that results in high levels of job losses that we've seen in some past instances.”

In the statement's aftermath, both short-term and long-term interest rates fell approximately five basis points, suggesting Powell’s comments were interpreted as slightly dovish. Market implied expectations now suggest no additional rate hikes or cuts by the end of 2023, 50 basis points of rate cuts by June 2024, and a cumulative 125 basis points of rate cuts by December 2024.

Moving forward

The next FOMC decision is scheduled for September 20, which will include the Fed’s quarterly updated Summary of Economic Projections. Market participants will be focused on incoming economic data over the next eight weeks as they assess the relationship between the Federal Funds rate, inflation, and the labor market. Although Powell described the recent inflation reading as better than anticipated, the timing around future Fed rate moves will remain dynamic and data dependent, as it has for much of this year.

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