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Federal Reserve policymakers raised a key short-term interest rate Wednesday and kept their options open for another rate hike in September, but futures markets investors and some economists think the Fed is probably done hiking rates.

The small, 25-basis point adjustment unanimously approved by Fed policymakers brought the federal funds rate to a target of between 5.25 percent and 5.5 percent, the highest level since 2001.

In a statement, members of the Federal Open Market Committee said they remain “highly attentive to inflation risks” and would be prepared to “adjust the stance of monetary policy as appropriate if risks emerge” to their goal of getting inflation back down to 2 percent.

The move had been expected, so the focus at the press conference following the meeting immediately shifted to what the Fed might do at its remaining three meetings this year. Having skipped a June rate hike, the first question Fed Chair Jerome Powell faced from reporters was whether the Fed will refrain from hiking in September but implement another increase in November.

“We haven’t made a decision to go to every other meeting,” Powell said. “We’re going to be going meeting by meeting. As we go into each meeting we’re asking ourselves the same question. We haven’t made any decisions about any future meetings including the pace at which we consider hiking. But we’re going to be assessing the need for further tightening that may be appropriate.”

In addition to raising short-term rates, Fed policymakers said the central bank will also continue to withdraw the support it had provided to mortgage markets during the coronavirus pandemic, letting $35 billion in mortgage-backed securities and $60 billion in Treasurys roll off its balance sheet each month as part of “quantitative tightening” that began last summer.

Hiking rates to fight inflation

In their efforts to tame inflation, Fed policymakers have now approved 11 increases in the federal funds rate since March 2022. Last year the Fed hiked rates by a total of 4.25 percentage points, raising the benchmark federal funds rate by 50- or 75-basis points at a time. This year it’s approved four smaller, 25-basis point increases — in February, March, May and July.

The CME FedWatch Tool, which monitors futures markets to gauge investor sentiment of the Fed’s next moves, puts the odds that the Fed will hike again in September at just 20 percent.

“We think the data will tell the Fed not to hike again, though the risk probably is higher” than futures markets would suggest, Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note to clients.

But if the economy continues to slow or tips into a recession, as forecasters at Fannie Mae predict, the Fed is expected to reverse course and begin lowering rates next year.

The Fed is keeping a close eye not only on inflation but the labor market, and “both are now moving in a direction which could allow this hike to be the Fed’s last for this cycle,” said Mortgage Bankers Association Chief Economist Mike Fratantoni in a statement. “We expect that to be the case, but for the Fed to hold off on any rate cuts until we are well into 2024.”

Thanks to the recent unexpected strength in the economy, Fannie Mae forecasters don’t see mortgage rates coming down below 6 percent until the final three months of next year.

Mortgage rate forecasts diverge

But in a July 20 forecast, economists at the Mortgage Bankers Association said they still anticipate sub-five percent mortgage rates by the final three months of next year.

“We do expect mortgage rates to trend down once the [Federal Open Market Committee] clearly signals that they have reached the peak for this cycle, as the reduction in uncertainty with respect to the direction of rates should narrow the spread of mortgage rates relative to Treasury benchmarks,” Fratantoni said.

As he typically does when talking to reporters, Powell stressed that future decisions will be data-dependent.

“What are we looking at? The whole broader picture,” Powell said. “We’re looking for moderate growth. We’re looking for supply and demand through the economy coming into better balance. Including in particular the labor market. We’ll be looking at inflation. Asking ourselves does this whole collection of data, do we assess it as suggesting that we need to raise rates further? If we make that conclusion then we will go ahead and raise rates.”

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Email Matt Carter

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