Yesterday the U.S. Federal Reserve agreed to raise its benchmark policy rate by 75 basis points, bringing the target for the federal funds rate to 2.25% to 2.5%, as was widely expected by the market. Inflation rose to a higher-than-expected 9.1% in June, the highest since 1981. The market had been anticipating a 100 basis points increase until recent data painted an increasingly bearish view of the U.S. economy, with the Fed noting that “recent indicators of spending and production have softened.”

Going forward, our panel of analysts expects another 100 basis points of tightening this year. This would bring the federal funds target range to 3.50–3.75%. This is above the Fed’s estimate of the neutral rate of interest—the interest rate which keeps output at its maximum level while keeping inflation constant—and is therefore likely to be contractionary. This projection is in line with Fed Chair Powell’s comment made after yesterday’s decision that he thought some period of below-potential growth was needed for supply to catch up with demand.



Three Fed meetings remain this year. Our panel expects 50 basis points of additional tightening at the next meeting on 20–21 September, with the final 50 basis points of tightening projected to take place during the last two meetings in November and December.

That said, Chair Powell avoided giving explicit forward guidance on future rate hikes, stating that policy would be set on a meeting-by-meeting basis. As a result, forecasts will be adjusted in line with new information. Data released today shows the U.S. economy contracted for a second quarter running in Q2, which may lead the Fed to tone down its aggressive tightening ahead. Meanwhile, July inflation data is set to be released on 10 August.