JULY 26, 2023
Federal Reserve Board Chairman Jerome Powell testifies before a House Financial Services Committee hearing on the Federal Reserve’s Semi-Annual Monetary Policy Report, on Capitol Hill in Washington DC, on June 21. – Stefani Reynolds, AFP via Getty Images
WASHINGTON, D.C. – 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.
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.
At a news conference, Fed Chair Jerome Powell acknowledged inflation’s slowdown in June but added that while it’s “welcome, it’s just one report, one month of data.” He said the process of lowering inflation to the Fed’s 2% goal “has a long way to go.”
“The labor market continues to be strong,” he said, noting the Fed wants to bring supply and demand in the economy and labor market “into better balance.” Otherwise, consumer prices could surge again.
Noting the Fed will see two more inflation reports and two jobs reports before its next meeting in September, Powell said, “It’s certainly possible we would raise (rates) again at the September meeting and it’s also possible we would hold steady.”
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.
“We’re seeing strong spending and a strong economy and that made us confident we can go and raise interest rates for a third time” since the Silicon Valley Bank crisis in March, Powell said.
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 bank savings yields after years of paltry returns.
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.
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.
The resilient economy also seems to be persuading Fed officials that the inflation could be tamed without triggering a recession. Powell said Fed staffers are no longer predicting a downturn.
“There is a pathway,” Powell said.
The Consumer Price Index (CPI) is a measurement of the average change in prices for certain products and services during a period of time, according to the Bureau of Labor Services.
The Federal Reserve keeps its eye on two key spokes of the economy, price stability and maximum employment, and those are the main considerations in its interest-rate decisions. The Fed looks at the CPI to help determine if prices are “stable.’’
Core prices leave out volatile food and energy items and therefore give a more accurate snapshot of longer-term trends.
The average interest rate on newly financed vehicles jumped to 7.2% in June, the highest it’s been in 16 years, and up from 5.2% a year earlier. Used vehicle rates leaped to 11% from 8.3%, according to car industry data from Edmunds.
Meanwhile, the average monthly payment of $733 for a new vehicle in the three months ending June 30 was a record ‒ and up from $678 a year earlier. And a record-high 17.1% of consumers financed a new vehicle with a monthly payment of $1,000 or more, Edmunds said.
“The good news for new car buyers is that automakers have gradually offered more subsidized loan programs as inventory has improved and stabilized,” said Jessica Caldwell, Edmunds’ executive director of insights. “That should take some of the sting out of rising interest rates for qualified consumers with good credit, with the caveat being a shorter loan term than desired in many cases. All other shoppers will need to tread cautiously.”
The rejection rate for auto loans in June rose to 14.2%, the highest level since this data was first collected in 2013, as lenders become leery of borrowers who have struggled with high inflation and a surge in interest rates and have piled on debt to make ends meet.
Many lenders, including Fifth Third Bancorp, Citizens Financial, U.S. Bank and Capital One Financial, have already either cut out or scaled back auto lending.
The rejection rate for people applying for credit jumped to 21.8% in June, the highest level in five years, according to a Federal Reserve survey released earlier this month.
Rejection rates for credit cards, credit card limit increase requests, mortgages, and mortgage refinance applications rose to 21.5%, 30.7%, 13.2%, and 20.8%, respectively, the Fed said. Major banks have reported setting aside more money to cover bad consumer loans as credit card balances rise.
Not necessarily. The Fed can impact but doesn’t directly set mortgage rates, so home loan costs may not shift significantly in the near term. Other factors, like housing demand and the economic outlook, also influence mortgage rates.
Those rates did double in the wake of the first Fed rate hikes last year, but the most recent moves by the central bank have had minimal impact.
“Each month when the Federal Reserve has raised rates most of the time the mortgage market has already baked in those rate increases because it’s been very clear what the Federal Reserve had intended to do,” says Bright MLS Economist Lisa Sturtevant.
Nevertheless, any action that makes consumers or investors less certain can cause mortgage rates to fluctuate. And in the three periods since the late 1970’s when the Fed raised interest rates to cool the economy, prices generally stayed steady, but the number of existing homes sold declined.
The average rate for a 30-year fixed mortgage was 6.78% as of July 20, according to the latest data from Freddie Mac. The 15-year fixed-rate mortgage averaged 6.06%
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.
When is the next Fed interest rate decision?
The Fed’s meeting schedule is:
July 25-26
Sept. 19-20
Oct. 31/Nov. 1
Dec. 12-13
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.
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.
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 S&P 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 a 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.”
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.
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%
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.
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.
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%.
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 debt becoming delinquent rose for most debt types, according to the New York Federal Reserve.
The worst of the current bout of inflation is probably behind us, with the four-decade high inflation rate of 9.1%, 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.
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.
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.
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.
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.
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 haircuts and car repairs continue to cost more as employers offer higher wages to keep workers amid lingering labor shortages.
When will the Fed lower interest rates? With more hikes expected in 2023, timeline shifts
Courtesy/Source: This article originally appeared on USA TODAY
