The Federal Reserve has increased interest rates for what may be the last time in 2023.

After not hiking in June, Fed officials unanimously agreed July 26 to approve another hike of 25 basis points, raising the benchmark federal funds rate target range to between 5.25% and 5.5%. The upper bound of the rate has not been as high as 5.5% since 2001.

Many expect this will be the last interest rate increase in the current hiking cycle. Shortly after the Fed announced a 25-basis-point hike, more than 80% of traders were betting that the Fed would not hike at their September meeting, according to the CME FedWatch Tool, which measures investor sentiment in the fed funds futures market.

However, with inflation still well above the central bank's target, the jobs market still tight and much of the US economy still unscathed, it could be quite a while before monetary policy loosens.

"The economy is still strong," said Patrick Leary, a managing director with Loop Capital Markets. "It's going to be hard to make a meaningful dent in inflation as long as the economy remains so strong."

Fed tightening impact yet to hit

While the Fed's 525 basis points worth of hikes since March 2022 have cooled inflation, much of the economy remains hot.

"We've covered a lot of ground and the full effects of our tightening have yet to be felt," Fed Chairman Jerome Powell said during his July 26 press conference.

The Fed's rate hike pace has been one of the most aggressive in its history, yet consumer spending and wage growth continue to vex these policy efforts, said Todd Thompson, managing director with Reams Asset Management.

"My guess is they're very frustrated," said Thompson. "They're not seeing the slowdown and the demand destruction that they want."

Consumer confidence, for example, reached its highest point in two years in July, The Conference Board reported July 25.

At the same time, Fed hikes have caused mortgage rates to increase to the highest level in more than 20 years, but the market has yet to cool.

Housing supply has struggled to keep up with demand, as homeowners who locked into relatively low mortgage rates during the pandemic are now reluctant to sell.

Home prices are unlikely to fall much in the near term as demand remains strong largely due to the persistently tight jobs market, said Thomas Simons, a senior economist at Jefferies.

"Home prices aren't likely to fall in my view unless there is forced selling, spurred on by weakness in the labor market," Simons said. "The confidence data suggests that consumers aren't particularly worried about that."

The unemployment rate has been below 3.7% since the Fed began hiking rates in March 2022, while a record number of Americans have returned to work.

The US labor market remains "very tight," Powell said, pointing out that labor demand "substantially exceeds the supply of workers."

The labor force participation rate, a measure of the number of potential workers employed, for so-called prime-age workers, those between the ages of 25 and 54, rose to 83.5% in June, the highest level since 2002.

Inflation reacceleration?

If businesses continue to increase wages to lure workers to millions of open positions, the economy will remain hot, said Leary with Loop Capital Markets.

"As long as employment remains strong, people are going to keep spending," Leary said.

If the labor market does not cool soon, Leary said he expects that inflation will reaccelerate later this year.

Overall inflation may creep up this summer, as energy prices rise, but core inflation, which removes volatile energy and food prices, is likely to slow further as the prices of housing rent and used cars fall, James Knightley, chief international economist with ING, wrote in a July 26 note.

By the September meeting, "we think the Fed will have evidence suggesting inflation remains on the path to 2% and that activity is slowing to below trend rates and the jobs market is cooling as desired," Knightley wrote.

With jobs and inflation reports for July and August slated for release before the Fed's next meeting in September, Powell said it was "certainly possible" that the Fed would hike again if data fails to show signs of slowing.