As was expected, yesterday, on July 26, The U.S. Fed’s Open Market Committee, FOMC, decided unanimously to increase the Federal funds rate to a target range of 5.25% to 5.5%, the highest level in 22 years, adding in an announcement that the central bank will “assess additional information and its implications for monetary policy.” Apparently the U.S. central bank was inspired by a slew of positive economic data that were coming recently. Thus, according to a report from the firm Challenger Gray & Christmas, after a long stream of job cuts over the past 12 months centered primarily around manufacturing, tech and banking, layoffs in June dropped to a 7-month low, falling nearly 50% from May to June.

Why is the Fed so relaxed not only hiking interest rates, but also predicting more tightening going forward, even though many vital U.S. economic sectors began really suffering? Thus, according to Redfin quoted by CNN, just 1% of all U.S. homes changed hands in 1H 2023, representing the lowest share in at least a decade. Only about 14 out of every 1,000 existing homes moved from one owner to another over the study period, compared to 19 of every 1,000 during the same period in 2019 as mortgage rates jump higher, closing in on 7%.

The likely answer lies not only in a sudden spike of good data, but by the very market behavior. Judging by the ongoing stock market euphoria where investors are remaining largely ignorant to Fed’s actions, even though more companies present weaker quarterly results, Fed feels free to keep hiking multiple times until investors realize something isn’t going right. To outline this dangerous situation, the New York Fed on July 7 issued a stern warning in its recession probability study:

This graph shows that synergy of factors are in favor of a more severe upcoming recession than even before the 2008 global financial crisis.