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Yahoo Finance Federal Reserve Reporter Jennifer Schonberger breaks down what to expect from the Fed following the July FOMC meeting.

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The Federal Reserve is widely expected to deliver a rate hike following the July Federal Open Market Committee (FOMC) meeting. This move comes as the US economy shows a robust recovery from the impact of the COVID-19 pandemic.

The FOMC meeting, scheduled for July 27th and 28th, will be closely watched by investors and economists alike. It is anticipated that the Federal Reserve will announce an increase in the target range for the federal funds rate, which currently stands at 0 to 0.25%.

Several factors support the case for a rate hike. Firstly, the US economy is experiencing strong economic growth, driven by fiscal stimulus measures and an uptick in consumer spending. The GDP growth for the second quarter of 2021 exceeded expectations, indicating a solid rebound from the pandemic-induced slump.

Furthermore, inflation has been climbing over the past few months. The Consumer Price Index (CPI) for June showed an inflation rate of 5.4%, the highest in over a decade. While some argue that this surge in inflation is transitory, the central bank might opt for a pre-emptive rate hike to prevent excessive price increases from becoming entrenched.

Moreover, the labor market has shown significant improvement, with the unemployment rate dropping to 5.9% in June. The Federal Reserve has stated that achieving maximum employment is one of its policy goals, and the improving job market strengthens the case for a tighter monetary policy.

However, there are dissenting voices within the central bank. Some policymakers argue that it is still premature to raise rates, as there might be lingering uncertainties regarding the sustainability of the economic recovery. They suggest that waiting for more concrete evidence of inflationary pressures and stable employment gains would be a more prudent approach.

The Federal Reserve has been grappling with the challenge of striking the right balance between supporting economic growth and controlling inflation. The ultra-low interest rate environment put in place during the pandemic has helped buoy the economy but has also fueled concerns of asset bubbles and future inflation risks.

If the expected rate hike materializes, it could signal a shift in the Federal Reserve’s monetary policy stance. However, market participants will closely scrutinize the central bank’s communications for any indications of the pace and timing of future rate hikes.

Investors will also keep a close eye on the FOMC’s views on tapering its asset purchase program. Since the onset of the pandemic, the Federal Reserve has been purchasing Treasury securities and mortgage-backed securities to provide liquidity and support financial markets. Any hints of a reduction in these bond-buying activities would have implications for interest rates and market sentiment.

Overall, the July FOMC meeting will be a significant event for both the financial markets and the broader economy. The decision on interest rates and any accompanying statements will provide a clearer picture of the Federal Reserve’s stance on monetary policy. As the US economy continues its recovery, striking the right balance will be crucial to ensure sustained growth without overheating.