Tough Calls Await the Fed After Latest Rate HikeToughCallsAwaittheFedAfterLatestRateHike

The Federal Reserve lifted interest rates to their highest level in 22 years, continuing its campaign to slow the US economy and reduce inflation. After forgoing a hike in June, the central bank’s policy-setting committee on Wednesday raised the benchmark interest rate by 25 basis points and left the door open to further hikes. As signs emerge that inflation is receding, the Fed faces some difficult calls ahead. The sharp rise in rates over the last 16 months and easing supply-chain disruptions have helped bring headline consumer inflation down to 3% year-over-year, below last year’s high of 9.1%. Yet core inflation, which remains well above the Fed’s 2% target, is proving stickier than some economists anticipated.

Meanwhile, the US economy grew faster than expected in the second quarter, expanding 2.4% on an annualized basis, an initial estimate published on Thursday showed. Further clarity on the state of consumer spending and prices may come with the release of personal consumption and expenditures (PCE) data on Friday. Although the Fed is open to additional rate increases, the main signal from this week’s meeting is that the end of the hiking cycle is quite close, PGIM Fixed Income says in a new post on The Bond Blog. A couple of important dovish themes did emerge, including the Fed’s willingness to cut rates before inflation reaches its 2% goal.