Investing.com -- The Federal Reserve raised interest rates by a quarter-point on Wednesday, signaling the need to put a further squeeze on elevated inflation after skipping a hike last month.
The Federal Open Market Committee, or FOMC, the rate-setting arm of the Fed, raised its benchmark rate to a range of 5.25% to 5.5%.
Fed keeps options open to go again, or pause later this year
It was the eleventh rate hike in the cycle, taking rates to the highest level in 22 years, Federal Reserve chairman Powell was eager to keep the central bank's monetary policy options flexible, saying either a hike or pause was on the table for September.
"It is certainly possible that we would raise funds again at the September meeting if the data warranted, Powell said. It's possible that we would choose to hold steady at that meeting ... we're going to be making careful assessments meeting my meeting."
The remarks leave the door open to another hike later this year, giving the Fed ample room to adjust policy should inflation pick up.
"This Fed meeting was about going for maximum flexibility, giving them the ability to do one more quarter-point hike, but not more than that," Phillip Colmar, global strategist at MRB Partners told Investing.com's Yasin Ebrahim in an interview Wednesday.
"They've revised away the recession call, which I think was appropriate, but they suggested that inflation wasn't going to come down to the 2% target until 2025, which gives them flexibility in the months ahead," Colmar added.
Powell's reluctance to provide further clues on the pace of rate hikes, left market pricing on November rate hike close to unchanged from where it was before the meeting at about 40%, Jefferies said in a Wednesday note.
"We suspect Powell is probably pretty happy about that," it added.
Fed staff ditch recession call following recent upbeat data
The return to the rate-hike table followed recent data showing that the economy grew faster than expected in the first quarter; the labor market cooled in June; and inflation slowed more than expected.
The recent signs of strength in the economy has persuaded the Fed's staff, which produces its own forecasts independent of the forecasts of FOMC participants, to ditch its projection that the U.S. economy will enter a recession this year.
The Fed staff now has a "noticeable slowdown and growth starting late later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession," Powell said Wednesday in a press conference following the monetary policy decision.
The most recent reading on the core personal consumption expenditures price index -- which excludes food and energy prices, and is closely watched by the Fed as a more indicative measure of underlying price pressures -- rose by 0.3% in May from 0.4% and slowed to a pace of 4.6% on an annual basis from 4.7% previously.
The big debate - Is disinflation transitory or here to stay?
In a sign that the Fed isn't ready to declare victory on inflation, Powell said data showing slowing inflation in June was welcomed, but it was "only one report in one month's data."
"We hope that inflation will follow a lower path, consistent with the June CPI reading," he added. "But we don't know that and we're going to need to see more data"
As inflation continues to trend above the Fed’s 2% target, there is much debate on whether the recent signs of slowing price pressures, or disinflation, can persist, or may prove transitory.
Those in the ‘disinflation is transitory’ camp flag sticky price pressures in the inflation-heavy services sector supported by a still-strong labor market, in which real annual wages are on the up and up for the first time since March 2021, as risks to upside inflation.
“In contrast to the stabilization in goods prices, service price inflation has been much stickier. Manufacturers have seen the peak in their input prices, but service sector businesses continue to deal with higher labor costs,” Jefferies said in a recent note.
Others, however, believe disinflation is here to stay, and will likely force the Fed to downgrade its inflation forecasts.
Core PCE inflation is tracking below its projections, Morgan Stanley said in a recent note, likely leading to a “downgrade in the Fed's inflation forecasts at the September meeting.”
In a sign that the Fed isn't ready to declare victory on inflation, Powell said Wednesday that data showing slowing inflation in June was welcomed, but it was only "one month."
Fed remains data dependent
This debate is set to continue in the months ahead, and drive expectations about whether the Fed may follow through on its projections, released in June, for one more hike when it returns from its summer hiatus in September.
For now, the Fed reiterated it remains watchful over incoming economic data to "assess the appropriate stance of monetary policy."
The real Fed funds rate, which adjusts for near term inflation expectations, is now in "meaningfully positive territory," Powell said, adding that he continues to believe that the U.S. can avoid a recession.