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After a brief pause, the Fed is expected to raise interest rates on Wednesday, resuming the most aggressive streak of rate hikes in decades as it attempts to slow inflation.
Economists are predicting the central bank will boost its key rate a quarter of a percentage point to the range of 5.25% to 5.5%, the highest level in 22 years. But while the Fed hinted in June that it would implement increases at least two more times this year, some economists are questioning whether such moves are necessary as inflation continues to wane – a trend they say is driven more by supply chains flowing more smoothly and other post-pandemic factors than the central bank’s actions.
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
Protect your assets: Best high-yield savings accounts of 2023
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
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.
What time does Fed announce rate hike?
The Fed will announce whether or not it will raise its key rate at 2:00 pm ET on Wednesday, July 26.
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?
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
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.
When will the Fed lower interest rates?With more hikes expected in 2023, timeline shifts
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