WASHINGTON – Despite a recent pullback in inflation, the Federal Reserve raised its key interest rate by a quarter point Wednesday and signaled another hike is at least on the table, if not likely, in coming months amid a solid economy.
The move nudged the federal funds rate to a range of 5.25% to 5.5%, the highest level in 22 years.
In a statement after a two-day meeting, the Fed repeated that “determining the extent of additional policy firming (rate increases) that will be appropriate” to lower inflation to the Fed’s 2% target will hinge on inflation as well as economic and financial developments, among other factors.
Will the Fed raise interest rates again this year?
That suggests another rate increase is likely in September or November, Barclays wrote in a note to clients last week. Another hike would have been less likely if the central bank had reverted to language in a prior statement that referred to “the extent to which additional policy firming may be appropriate,” Barclays said.
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In its statement, the central bank said that “economic activity has been expanding at a moderate pace” – an upgrade from its previous description of “modest” growth. That’s a possible signal that the Fed believes the economy could withstand another rate hike and that sturdy growth may push inflation higher again.
“Job gains have been robust in recent months, and the unemployment rate has remained low,” the Fed added, echoing its previous statement.
The latest rate bump means another rise in borrowing costs for consumers and businesses who got a reprieve when the Fed paused its aggressive hiking campaign in June. Rates for credit cards, adjustable-rate mortgages, auto and other loans are now poised to climb again. But Americans, especially seniors, are finally reaping higher banks savings yields after years of paltry returns.
How much has the Fed raised interest rates?
After lifting its benchmark short-term rate by 5 percentage points in 14 months — its biggest flurry in 40 years – the Fed took a break in June to assess the lagged effects of a hard-nosed strategy that many forecasters say will cause a recession this year.
Yet at the same meeting, Fed officials forecast two more rate increases in coming months to contain a bout of pandemic-related inflation that hit a 40-year high of 9.1% a year ago. Although yearly consumer price increases have steadily eased, a “core” measure that strips out volatile food and energy items and better reflects long-term trends has remained stubbornly high.
Earlier this month, however, the consumer price index unexpectedly revealed that both overall inflation and the core reading slowed notably in June, to 3% and 4.8%, respectively, though that’s still above the Fed’s 2% target. Goldman Sachs believes Wednesday’s rate hike will be the last now that inflation has reached a “turning point.”
“By the November meeting, we expect the core inflation trend will have taken a decisive step down… and that this will convince (the Fed) that a second hike is unnecessary,” Goldman wrote in a note to clients.
Markets that predict fed funds rate movements also believe the central bank will now hold rates steady before cutting them next year.
How is the U.S. economy doing right now?
Barclays, however, says a still resilient economy and stock market will persuade the Fed to raise rates once more.
On Thursday, the government is expected to report that the economy grew a fairly solid 1.8% in the second quarter, faster than many forecasters projected earlier this year.
Last month, employers added 209,000 jobs and average wages grew 4.4% annually. Both mark slowdowns from earlier paces but are still strong showings. Initial jobless claims, a gauge of layoffs, have retreated toward historically low levels after rising in June.
Consumer spending, the economy’s main engine, is still robust despite higher borrowing costs and prices. A core measure of retail sales that excludes volatile categories increased sharply last month.
And financial conditions have been favorable, with the S&P 500 stock index climbing steadily since March. That tends to lift consumer sentiment and bolster spending.
The positive economic backdrop likely makes the Fed “skeptical that inflation will remain on a downward trajectory toward its 2% target without another rate hike,” Barclays wrote in a research note.
Fed rate hike history
Inflation has cooled since the Fed started its rate hike campaign, but experts have mixed opinions on whether the Fed should take credit.
Some economists say little or none of the progress on inflation comes from the Fed’s interest rate hikes, and instead point to the unwinding of pandemic-related supply chain bottlenecks, a sharp drop in commodity prices and a pullback in COVID-19-related consumer spending binges. Others say the central bank has played a supportive role by affecting consumer inflation expectations and modestly dampening a hot job market.
What is the 2023 Fed meeting schedule?
The Fed’s meeting schedule is:
- July 25-26
- September 19-20
- October/November 31-1
- December 12-13
What the Fed rate increases meant to credit card rates
The interest rates banks charge on their credit cards are pegged to the prime rate which is largely connected to the Fed funds rate.
In the late ’70s and early ’80s, state laws largely barred credit card lenders from charging more than 18%. In the mid-90s, with the prime rate hovering between 8% and 9%, credit card rates were 15.5% to 16%.
Now, as the prime rate has risen to 8.25%, the average interest rate for a new credit card has risen from 14.6% in February 2022 to 24.2% last week, according to LendingTree. That’s raised monthly interest charges to $140 – roughly a $55 monthly uptick – on the average American’s $6,965 credit card balance.
Unemployment number
The U.S. gained 209,000 jobs in June as the unemployment rate dipped from 3.7% to 3.6%, according to the Labor Department.
That growth came despite inflation and high interest rates that are making it more expensive for both employers and consumers to borrow. But it was also the weakest uptick since December, 2020.
How will another rate hike affect the stock market?
Stocks have been surging on hopes that inflation is slowing enough that a rate hike on Wednesday will be the last from the Fed this year, and the economy will avoid recession, – especially since the labor market is strong.
The benchmark broad market Standard & Poor’s 500 index closed Tuesday at the highest level since April 2022, while the blue-chip Dow had a winning streak of 12 consecutive days, the longest rally since February 2017.
Despite this impressive run, some remain wary because higher rates make borrowing and business investment more expensive. They also dampen consumer spending, which pares corporate profits and can spark layoffs. Some economists say that ripple effect could still occur, though most likely towards the end of the year.
“Recession risk is still elevated, pushed out but not quite eliminated,” said Alex Pelle, economist at Mizuho Securities USA. “Economic bears may yet be right that monetary policy lags will eventually have a serious bite.”
What is a recession?
A recession is “a significant decline in economic activity that spreads across the economy and lasts more than a few months,” according to Michael Pugliese, an economist with Wells Fargo.
The nonprofit National Bureau of Economic Research, which designates when a recession occurred, looks at various indicators such as the jobless rate, consumer spending, retail sales and industrial production.
The last two downturns happened when the economy was jolted by a housing crisis in 2008/2009 and then the COVID-19 pandemic in 2020, which led to massive layoffs as many businesses struggled or were forced to shutter when people hunkered down in their homes.
A recession this year would be triggered by the string of rate hikes implemented by the Federal Reserve to tame an economy that rapidly accelerated as the pandemic waned.
Monthly inflation rate
The inflation rate has decreased by more than half from its peak of 9.1% in June 2022. Here’s a look at the inflation rate in the U.S. by month since May 2022:
- May 2022: 8.6%
- June 2022: 9.1%
- July 2022: 8.5%
- Aug 2022: 8.3%
- Sept 2022: 8.2%
- Oct 2022: 7.7%
- Nov 2022: 7.1%
- Dec 2022: 6.5%
- Jan 2023: 6.4%
- Feb 2023: 6.0%
- Mar 2023: 5.0&
- Apr 2023: 4.9%
- May 2023: 4.0%
- June 2023: 3.0%
How high will interest rates go in 2023?
In June, the Fed forecast additional rate hikes amounting to a half percentage point this year, according to officials’ median estimate. That was a quarter point more than economists expected, and a half point more than the Fed projected in March.
The Fed felt it had to continue boosting rates since earlier hikes were having a minimal impact on inflation. But financial markets figure that while the key rate will likely get another push in July, there won’t be another hike this year because the economy and inflation will cool significantly without one.
Will Fed rate hike help savers?
Higher costs for borrowers can be good news for savers. After years of earning nearly 0% on savings deposits, another boost to the fed funds rate could earn savers another 20 to 30 basis points in high-yield online savings accounts, according to Ken Tumin, founder of DepositAccounts.com, which tracks depository banking products.
Stock market today
Stocks were mixed in morning trading as the markets waited on the Fed’s decision. Dow Jones futures were up a slight 0.03% and 10 year treasuries rose 3.86%. The S&P 500 was down 0.16% and Nasdaq dipped 0.40%.
Will Fed rate hike hurt borrowers?
The Fed’s rapid rate hikes have definitely punched consumers in the pocketbook. Because of the 500 basis points in rate increases from March 2022 to May 2023, borrowers already will pay $34.4 billion in extra interest charges over the next 12 months, according to WalletHub.
Another 25-basis-point increase, which is expected to be announced by the Fed on Wednesday, will cost consumers $1.72 billion more. That means the annual cost of the Fed’s recent rate bumps is a staggering $36 billion in total, WalletHub said. At the end of March, total household debt stood at $17.05 trillion, and the share of current debt becoming delinquent rose for most debt types, according to the New York Federal Reserve.
When will inflation go down?
The worst of the current bout of inflation is probably behind us, with the four decade high inflation rate of 9.5%, reached last June, dropping to 3% last month.
“I’ve seen forecasts of inflation coming down to normal levels by the end of 2023 and into 2024,” Fabio Gaertner, an associate professor at the Wisconsin School of Business, previously told USA TODAY.
For now, however, the current inflation rate is still well above the Fed’s 2% goal.
How does raising interest rates help inflation?
The Fed raises its key rate to make it more expensive for consumers and businesses to borrow, potentially putting a break on spending and slowing down spikes in the costs of goods and services.
How many times has the Fed raised rates?
Since March 2022, the Fed has increased its benchmark federal funds rate at 10 consecutive meetings by a total of 5 percentage points. That’s the steepest spate of rate hikes in forty years. But in June it broke that streak when it left the key rate unchanged.
Can the U.S. dodge a recession with a “soft landing?”
Amid stubborn inflation, economists have hoped for a soft landing that would mean prices are reined in without big jumps in joblessness or the economy contracting.
Many have predicted a rockier road, paved by the Fed implementing ten rate hikes in a row to get inflation under control. Those actions have threatened to tip the U.S. economy into at least a mild recession, economists say.
But a low unemployment rate, consistent consumer spending, and gradually falling inflation are giving some banks and investors more confidence that a “soft landing’’ could be the outcome.
“We have greater resiliency within the economy than I would have anticipated at this point in time, given the extent of rate increases we’ve gotten,” Matthew Luzzetti, Deutsche Bank’s chief U.S. economist said.
Are we in a recession?
No, though some economists say that if the Fed continues to raise rates, the U.S. will tip into a downturn.
So far it hasn’t happened largely due to consumers having significant savings to fall back on in the wake of the pandemic. During the global health crisis, when many Americans had to stay home and were on the receiving end of trillions of dollars in federal stimulus checks aimed at helping laid off workers survive, households accumulated roughly $2.5 trillion in excess savings.
That financial cushion has helped Americans stay afloat despite inflation that reached a four decade high last June and rising interest rates. Additionally, consumers who had to mostly stay home during the pandemic continue to be in a spending mood, with consumption rising 3.8% in the first three months of this year.
But savings are waning, with only about $1.5 trillion of the pandemic-related surplus remaining, according to Moody’s Analytics.
What is the Fed interest rate currently?
Following its most significant string of interest rate hikes in 40 years, the Federal Reserve pushed pause in June, leaving the benchmark rate in the range of 5% to 5.25%. It was the first time in 18 months that the central bank left the federal funds rate unchanged.
U.S. inflation rate
Consumer prices overall rose 3% in June as compared to a year earlier. That was down from the 4% uptick the previous month, according to the Labor Department’s consumer price index.
June marked the 12th month in a row that inflation cooled as static grocery prices took some of the sting out of gas prices that were again on the rise, and rent costs that remained stubbornly high.
Broadly, prices have been all over the map. Used cars for instance have become more affordable as pandemic-related snarls in the supply chain start to unwind. But services like hair cuts and car repairs continue to cost more as employers offer higher wages to keep workers amid lingering labor shortages.
Fed decision today
Though inflation is slowing, it remains above the Fed’s 2% target. That will likely lead the central bank to implement another increase this month after leaving the key rate alone in June to allow time to evaluate the impact of its previous string of hikes.
Still, the slow down of core price increases could compel the Fed to keep rates where they are for the rest of the year.
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