Fed combats inflation with another interest rate hike

The Federal Reserve System (Fed), acting as the U.S. central bank, announced one more interest rate increase. This measure is applied to curb unprecedented consumer prices growth as of August 17. 

Last month, Fed minutes reported inflation to be an indicator for determining the upcoming rate hike. The U.S. financial state is ambiguous. So, the central bank actions are aimed at fighting price elevations, while preventing the economy from recession. 

Interest rates are expected to slow down in the coming months. Nevertheless, two previous hikes prove the opposite. The last happened on July 27, with a 0.75 point rate rise. In addition, the FOMC filed for increasing the target range for the federal funds to 2.25-2.5%.

Consumer prices in the U.S. (CPI index) rose by 8.5%. A drop in the gas value contributed to the retail sales boom. Thus, indicators like national employment reports, the CPI and PCE indices, would be considered for setting interest rates by September 27, which corresponds to the Fed meeting.

“Since inflation in the country is at its highest level for recent decades, participants focused on the need to further increase interest rates,” the minutes say. "The inflation committee's target is 2%."

Based on CME Group assumptions, there exists a 47.5% chance of a 75 base points hike during the next meeting. 

"The Fed’s minutes demonstrate that controlling inflation is a central bank's top priority," said Chris Larkin, managing director of E-Trade. "Despite the current state, investors may be in for a likely rate cut before long."

“It should be realized that the minutes cover the period before wage growth and inflation data release occurred in July. Therefore, the Fed's decision will be based on the updated statistics for August," he noted.

Currently, the US Treasury yield curve has been in a state that often precedes a recession. However, the GDPNow forecasting tool points to a potential growth of 2.5% for the U.S. economy. 

With that said, the yield on 10-year Treasury bonds has remained fairly constant, amounting to 2.897%. While the yield on 2-year ones is fixed at 3.312%.