On July 26, 2023, the Federal Reserve raised its benchmark interest rates by 0.25 percentage points, bringing the rate to a range of 5.25% to 5.5%. This increase marked the highest level in more than 22 years. The decision came amid ongoing efforts to combat inflation and stabilize economic conditions. Federal Reserve Chair Jerome Powell expressed confidence in a potential soft landing for the economy and indicated that further rate cuts this year are unlikely. The markets reacted with mixed results, with the Dow Jones Industrial Average managing its 13th consecutive daily rise, while the S&P 500 and Nasdaq Composite experienced little change.
The FED’s Rate Hike Decision
The Federal Reserve’s Federal Open Market Committee (FOMC) voted unanimously to raise the funds rate by 0.25 percentage points, bringing it to a target range of 5.25% to 5.5%. This increase represented the 11th time the FOMC had raised rates since the tightening process began in March 2022. Chairman Powell emphasized that the central bank would continue to make data-driven decisions, assessing economic activity and inflation on a meeting-by-meeting basis.
Financial & Crypto Market Reaction, Powell’s Comments
The markets initially responded positively to the rate hike but ended with mixed results. The Dow Jones Industrial Average continued its upward trend, gaining 82 points, a 0.2% increase, marking its longest winning streak since January 1987. In contrast, the S&P 500 finished nearly flat, and the Nasdaq Composite experienced a slight decline.
Meanwhile, Bitcoin (BTC) experienced a 0.4% increase compared to 24 hours earlier, reaching $29,341. The Bitcoin Index surged to as high as $29,673 following the Federal Reserve’s decision to raise its rate benchmark by 25 basis points. The CoinDesk Market Index, which provides a comprehensive overview of cryptocurrency prices, saw a recent gain of 0.7%. Ethereum’s cryptocurrency, Ether (ETH), also rose by 0.7% to trade at $1,871.
During the press conference following the rating announcement, Chairman Powell acknowledged that inflation had moderated somewhat since the previous year but still had a long way to go to reach the Fed’s 2% target. He suggested that future rate decisions would depend on incoming data and its implications for economic activity and inflation. While two rate hikes were previously indicated for the year, the market had already priced in a likelihood of no further moves in 2023.
Economic Indicators and Fed’s Inflation Concerns
The central bank’s decision to raise interest rates was driven by concerns over elevated inflation levels. The consumer price index rose 3% on a 12-month basis in June, though it was lower than the 9.1% rate a year ago. However, excluding food and energy, the CPI remained high at a 4.8% rate, exceeding the Federal Reserve’s 2% target.
Despite the rate hikes, the economy showed resilience, with second-quarter GDP growth tracking at a 2.4% annualized rate, according to the Atlanta Fed. Employment figures remained robust, with nonfarm payrolls expanding by nearly 1.7 million in 2023, and an unemployment rate of 3.6% in June, the same level as a year ago.
Balance Sheet and Quantitative Tightening Efforts
Along with raising interest rates, the FOMC indicated its intention to continue cutting the bond holdings on its balance sheet. The balance sheet had previously peaked at $9 trillion before the Fed began its quantitative tightening efforts, and it currently stands at $8.32 trillion. They allowed up to $95 billion in monthly maturing bond proceeds to roll off.
The Federal Reserve’s decision to raise interest rates by 0.25 percentage points to a range of 5.25% to 5.5% marked the highest level in over two decades. While the markets reacted with mixed results, the Dow Jones Industrial Average extended its winning streak for the 13th consecutive day. Federal Reserve Chair Jerome Powell emphasized a data-driven approach for future rate decisions, with a focus on economic activity and inflation. Despite concerns over elevated inflation, the economy remained resilient, and the Fed’s decision aimed to strike a balance between stabilizing prices and sustaining growth.