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Federal Reserve delivers 0.75bp rate rise

The US Federal Reserve raised its policy interest rate by 0.75 basis points to 2.5% and indicated further increases will likely be appropriate.

Explaining the decision, Federal Reserve chair Jerome Powell said: "From the standpoint of our congressional mandate to promote maximum employment and price stability, the current picture is plain to see: The labour market is extremely tight, and inflation is much too high."

Aside from continuing the process of significantly reducing the size of its balance sheet, Powell noted that indicators of spending have softened, growth in consumer spending has slowed and activity in the housing sector has weakened.

However, despite these developments Powell said that the labour market remains extremely tight, with the unemployment rate nearing a 50-year low, job vacancies nearing record highs and wage growth elevating.

Over the last three months US employment rose by an average of 375,000 jobs per month, down from the averages experienced earlier this year, but still robust, Powell said.

There have also been widespread improvements in labour market conditions, including for workers on the lower ends of wage distribution as well as for African Americans and Hispanics.

Subsequently, according to Powell, the continued strength of the labour market suggests that underlying aggregate demand remains solid.

Meanwhile, inflation remains well above the Federal Reserve's long term 2% target.

In June, the 12-month change in the consumer price index (CPI) came in above expectations at 9.1% and the change in the core CPI was 5.9%.

Although aggregate demand continues to appear strong, Powell said supply constraints have been larger and longer lasting that anticipated. He also said that price pressures are evident across a broad range of goods and services.

"My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing and transportation," he said.

"We are highly attentive to the risks high inflation poses to both sides of our mandate and we are strongly committed to returning inflation to our 2% objective."

GSFM investment strategy adviser Stephen Miller commented that such a move was widely anticipated by financial markets.

"While noting that the Federal Reserve would obviously slow the pace of increases at some point, Powell sought to give himself and the board maximum optionality with regard to future moves by stating that policy would be set on a meeting-by-meeting basis rather than offer any explicit guidance on the size of the next rate move," Miller said.

"Powell said that he did not believe the economy was in recession, citing a 'very strong labour market' as evidence.

"The accompanying Statement from the FOMC also implied that Federal Reserve officials believe that they can manage a so-called soft landing for the economy and avoid a steep downturn."

On the back of Powell's speech, US equities rallied, while Treasury yields fell along with the US dollar.

"Financial markets have recently pared bets of the likely peak in the policy (fed funds) rate. They now see that rate peaking around 3.25% at year-end and imply some modest easing thereafter to around 3% by end-2023," Miller contended.

Read more: Labour marketUS Federal ReserveCPIJerome PowellStephen MillerFOMCGSFM