Fed hikes interest rates 0.75%, warns of 'tightening'

Plus, consumer confidence is down, and orders for durable goods are up.

Fed hikes interest rates 0.75%, warns of 'tightening'

At a time of 40-year-high inflation and concerns about a recession, economic data is being watched closely. Here's a look at the latest updates from a busy week of reports, including an announcement from the Federal Reserve about the latest interest rate hike:

Fed decision: 0.75% rate hike

When the Federal Reserve announced its decision on whether to hike interest rates on Wednesday, the result was the same as June’s meeting: A 0.75% increase in the benchmark rate.

Prior to the last two months, the last time the Fed hiked interest rates at 0.75% was in 1994. Collectively, the increase over the last two months is the largest since the 1980s, Bloomberg noted.

The primary reason for the hike, according to Federal Reserve Chairman Jerome Powell: Data continues to show inflation is still high. The Fed’s preferred measure of inflation, called the Personal Consumption Expenditures index, rose 6.3% year-over-year in June. The Fed’s target for that rate is 2%. So, it once again made a move to raise rates, as expected.

Here’s how Powell described the current economic situation:

Notwithstanding the recent slowdown in overall economic activity, aggregate demand appears to remain strong, supply constraints have been larger and longer lasting than anticipated, and price pressures are evident across a broad range of goods and services. Although prices for some commodities have turned down recently, the earlier surge in prices of crude oil and other commodities that resulted from Russia’s war on Ukraine has boosted prices for gasoline and food, creating additional upward pressure on inflation.

This came with an acknowledgement by Powell that the Fed believes a slowdown in growth of economic activity is necessary to rebalance supply and demand. It has likely yet to arrive.

“These rate hikes have been large and they’ve come quickly,” Powell said. “It’s likely that their full effect has not been felt by the economy so there’s probably some significant additional tightening in the pipeline.”

However, Powell said he doesn’t believe the economy is in a recession. This is because the labor market is strong. Employment has been holding steady at 3.6% for a few months, and the economy added 372,000 jobs in June.

As for future rate hikes, Powell said the Fed is taking its decisionmaking on a “meeting by meeting” basis. The committee that makes decisions next meets in September. Powell said that “another unusually large increase could be appropriate” at the next meeting, but that will depend on economic data released between now and then. However, he said a slowdown in rate hikes will eventually be necessary.

“As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation,” Powell said.

The guiding principle of monetary policy at the moment: The Fed is “strongly committed to returning inflation to its 2% objective.”

The latest news hits on two levels. For one, the hike in the interest rate will make borrowing money more expensive, affecting loans as well as personal credit that can affect consumer activity. In the bigger picture of the economy, the Fed said it is engineering a slowdown in order to cool demand. Powell said this is necessary to get prices down and create a healthy labor market over the long-term. In the short-term, however, it could mean more pain. Americans are already bracing for it, but keep in mind that consumers have already faced months on end of higher prices for gas, food and other essential goods. The cumulative effect is starting to show in spending with some of the largest brands.

Consumer confidence falls

a chart showing consumer confidence

The Conference Board's Consumer Confidence Index. (Courtesy photo)

When it comes to how consumers are feeling about the economy, the trend line is pointing down.

Consumer confidence fell to its lowest level since February 2021, dropping for the third consecutive month, according to the Conference Board. The organization's index surveys consumer attitudes, spending plans, and expectations about the economy.

Survey results showed mixed feelings about the current situation and the labor market. But consumers were more pessimistic about their short-term financial prospects.

“Concerns about inflation—rising gas and food prices, in particular—continued to weigh on consumers. As the Fed raises interest rates to rein in inflation, purchasing intentions for cars, homes, and major appliances all pulled back further in July,” said Lynn Franco, senior director of economic indicators at The Conference Board. “Looking ahead, inflation and additional rate hikes are likely to continue posing strong headwinds for consumer spending and economic growth over the next six months.”

Durable goods orders rose in June

Orders from manufacturers for durable goods increased 1.9% in June, according to US Commerce Department data released Wednesday.

Durable goods are items that are meant to last at least three years. Key categories that showed movement include:

  • Driving the increase: New orders of transportation equipment were up 5.1%, while new orders of defense aircraft were also up.
  • Increases were also reported in new orders for motor vehicles, computers and electronics and fabricated metals.
  • A decrease in new orders was observed in machinery and communications equipment.

The figures are not adjusted for inflation. Still, this indicator’s headline increase is a sign of activity continuing ahead. New orders rose 0.8% in May, and they’ve risen in eight of the last nine months.

A few more indicators released this week:

  • Retail inventories, which are in focus as retailers like Walmart and Target work through overstock, rose 2% in June compared to the month prior, and 19.9% year-over-year.
  • Wholesale inventories rose 1.9%, and 25.6% year-over-year.
  • The international trade deficit fell $5.9 billion from May to June. Exports rose by $4.4 billion, while imports were down $1.5 billion.

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