US Fed lifts rates to highest since 2001 and hints at more to come

WASHINGTON

The U.S. Federal Reserve raised its benchmark lending rate on July 26 to the highest level since 2001 to tackle above-target inflation, and signaled it could hike again later this year amid improving economic prospects.

"Policy has not been restrictive enough for long enough to have its full desired effects," Fed Chair Jerome Powell told reporters after the decision to lift interest rates by a quarter percentage-point was announced.

"So we intend, again, to keep policy restrictive until we're confident that inflation is coming down sustainably toward our two percent target, and we're prepared to further tighten if that is appropriate," he added.

The increase, after a brief pause in June, brings the Fed's key lending rate to a range between 5.25 percent and 5.5 percent.

In a statement, the U.S. central bank said it will "continue to assess additional information and its implications for monetary policy," looking at a range of data points "in determining the extent of additional policy firming."

This indicates that officials see the possibility of more monetary tightening ahead.

"We're going to be going meeting by meeting," Powell said.

At the previous meeting of the rate-setting Federal Open Market Committee (FOMC) in June, the median forecast was for two additional rate hikes this year.

The latest quarter percentage-point rise, which was in line with analysts' expectations, is the Fed's 11th since it began an aggressive campaign of monetary tightening in March 2022 in response to rising prices.

Although inflation has continued to fall since the decision in June to pause rate hikes, it remains above target, suggesting more policy action may be needed.

"Inflation has moderated somewhat since the middle of last year," Powell said on July 26, adding that the "process of getting inflation back down to 2 percent has a long way to go."

Meanwhile, unemployment has remained close to historic lows and economic growth for the first quarter was revised up sharply on resilient consumer spending data.

"The Fed will stand its ground and hold rates high well into 2024, barring a more pronounced slowdown in the economy and rise in unemployment," KPMG US's chief economist Diane Swonk wrote in a note published shortly after the Fed decision on July 26.

"The goal is to defeat, not just cool, inflation," she said, adding that KPMG expects another rate hike in November, "given the time needed to assess how rapidly the economy is actually cooling and the risk of noise due to strikes."

Recent positive economic news has increased the chances of a so-called "soft landing," in which the Fed succeeds in bringing down inflation by raising interest rates while avoiding a recession and a surge in joblessness.

On July 26, Powell reiterated that he felt a soft landing remains possible.

"It has been my view consistently that we do have a shot," he said. "That's been my view, that's still my view."