Fed Rate Hike in July Is Likely For Three Reasons

Last month, for the first time in the past 15 months, the Federal Reserve didn't increase its key interest rate, pausing its aggressive series of 10 consecutive rate hikes as it waited to see their impact on the economy.

Housing market experts rushed to praise the Fed's decision, warning against the devastating effect another hike could have on the sector. But the Fed's chairman, Jerome Powell, said that the central bank will likely raise its key rate twice more before the end of the year.

There are at least three reasons to believe that those hoping for another pause will soon be disappointed, experts told Newsweek, as the economy is showing hints that the Fed might hike interest rates again this month. Last month, Powell said the Fed's July meeting will feature a "live" decision on a rate hike.

The Fed's Next Likely Move?

"The Fed has been signaling that they are ready and willing to hike rates further," Kara Murphy, chief investment officer of Kestra Investment Management, told Newsweek. "While they've been careful to give themselves some wiggle room on the timing, they are likely to raise rates at the next meeting because of data that continue to show a hotter economy that they are comfortable with."

Liz Ann Sonders, managing director and chief investment strategist at Charles Schwab, agrees and cited another reason for a rate increase: market expectations.

"Market expectations are sort of firmly in one direction, and the Fed under Jerome Powell doesn't tend to go against market expectations," she told Newsweek, referring to the chances of a Fed rate hike in July. The Chicago Mercantile Exchange says those chances are estimated to be 92 percent.

"It's pretty much a lock that the Fed's going to raise rates in July," Sonders said. "What they do beyond that, the meeting after that in September, we don't know because they're making decisions based on the data."

The Fed's next move might not appear obvious because inflation has dropped significantly since reaching a peak of 9.1 percent in June last year. The latest data, which is for May, shows inflation at 4.0 percent. While this is obviously a positive development, Sonders said that figure is still far from the Fed's ideal inflation rate—and a reason why the Fed is likely to hike interest rates again.

"The Fed target is 2 percent," she said, "and inflation is nowhere near there."

"There are areas where inflation has cooled significantly, especially goods and commodities, where inflation is already below the Fed's target of 2 percent," Murphy said. "But for the Fed to declare victory in its campaign against inflation, we have to see softening in the labor market, which drives both wage inflation and services inflation. Both those inflation components continue to be well above the Fed's comfort level."

The Job Market and Banking Sector

The third factor that the Fed might be taking into consideration is the job market, which is "maybe not hot but strong enough that the Fed feels like there's still more work to do," Sonders said.

"The latest jobs data shows that, despite a year and a half of tighter monetary policy, the labor market remains extraordinarily tight," Murphy said, adding that this suggests that the Fed will hike rates again in two weeks.

That is, unless there's a banking crisis from out of the blue, Sonders said. "The other thing that's important in terms of things that the Fed is paying attention to is the banking system and/or, more broadly, the financial system," she said.

She continued: "Three out of the four largest bank failures in U.S. history occurred this year. Even though it's not an official mandate, like inflation and jobs, the Fed is also charged with maintaining stability in the banking system and the financial system...and it did access these tools at the time of the Silicon Valley Bank's collapse."

So one factor that could lead to the Fed not raising rates this month is "something really serious happening in the banking system," Sonders said.

"I'm not saying I think that's going to happen. There's no indication of that. But, you know, things can happen that are black swan surprise events," she added.

Correction 7/10: This article was updated to use the full name of Liz Ann Sonders.