Let’s travel back in time. Friends is the top TV show. All for You by Janet Jackson is the top song. AOL has 28 million users and AOL.com is the top website. George W Bush is president. Flip phones and Blackberries dominate the cell phone market. Gas is $1.46 per gallon. It’s early 2001. A lot has changed in 22 years – and yet, early 2001 was the last time that the Federal Funds Rate was higher than it is now.

On Wednesday July 26, 2023, the US Federal Reserve once again raised the Federal Funds rate by 0.25%, bringing its target range to 5.25 – 5.5%. This increase had been well telegraphed and markets seems to take it in stride.

It was clear that while progress has been made on inflation, the Federal Reserve still feels it is too elevated. “Inflation has moderated somewhat since the middle of last year,” Powell said Wednesday during the press briefing. “Nonetheless, the process of getting inflation back down to 2% has a long way to go.” Powell commented (as he had at almost every meeting) that the worst outcome would be for the Fed to fail at taming inflation – so that remains the focus.

The question now becomes – are we done yet? Was this the final hike? Have we reached the finish line?

To that end, Jerome Powell (Chairman of the Federal Reserve) was less definitive. “I would say it is certainly possible that we would raise funds again at the September meeting if the data warranted,” Powell said. “And I would also say it’s possible that we would choose to hold steady at that meeting. We’re going to be making careful assessments meeting by meeting.”

The two main sets of data they are watching are inflation and the labor market. The Fed will have two months of data before their next policy decision so hopefully, the trend lines will be convincing. Powell did acknowledge that they will likely stop hiking prior to inflation reaching 2%, as well as stated that the June inflation report was encouraging. But again, he was quick to point out that the data between now and the next meeting will drive the decision and that nothing has been decided at this time.

Powell also commented on the resiliency of the US economy, noting that the central bank is no longer predicting a recession later this year (but just a modest slowdown in growth). This seems to indicate that the Fed believes a soft landing is possible, even after all the rate hikes.

With all that said, is this the finish line? No one can say that for certain, but a case can certainly be made that the data has been – and likely will continue – to trend down and be supportive of no further hikes. A smart analysis I read this week pointed out five headwinds in the coming weeks that are likely to slow spending even further and give the Fed reason to stop. They include:

1. Slowing disposable income (thanks to student loan payments starting back up)
2. Heat wave (keeping people indoors and leading to high utility bills that lessen disposable income)
3. Fiscal restraint, as the budget negotiations come back into focus

However, you could just as easily dissect inflation data and point to jobs data and make a case that further hikes will be needed. Time will tell – the good news is (a) we have two months to catch-up our breath and (b) all we have to do is wait and see.

Onward we go,