After a pause last month, would anyone be surprised if the Federal Reserve raised short-term rates by .25% again tomorrow? Not after hearing statements by Chairman Powell during the past month. As a matter of fact, he indicated that two increases in a row were on the table – though the Fed does not meet again in September. Why does the Fed continue to be so hawkish, especially in light of the progress we have seen in the fight against inflation?
The main reason is that the economy does not seem to be slowing down. So many were expecting a recession to start by now, but the economy keeps chugging along. The upward revision of the first quarter growth rate (GDP) to 2.0% was a surprise and is an important example, along with the strong jobs market. The Fed keeps waiting for the economy to cool down so that there is less demand for labor and goods.
But the economy is just being too stubborn. Even the real estate market is showing resiliency in the face of an inventory shortage and high mortgage rates, as new home sales are soaring. This shows that, if there were more homes available, more would be buying. Some had predicted that home prices would fall from their highs of last year, but actually recent data is showing that home prices are holding up nicely. If the Fed is surprised at the resiliency of the economy, we should not be surprised if the Fed tacks on one more rate increase