Consumers and investors were spared Wednesday’s rate hike after Fed officials voted to keep the benchmark borrowing rate unchanged at their September meeting.
Do not take this pause as an indication that authorities are ready to clear the air on inflation.
Along with the September interest rate decision, policymakers at the Federal Open Market Committee (FOMC), which sets interest rates, signaled in new economic forecasts that they expect one more rate hike this year.
If approved, the measure would push the Fed’s key benchmark interest rate to a 22-year high of 5.5% to 5.75%. But it could also be the last. The Fed’s new forecast shows that only one official expects interest rates to rise by more than that.
Higher interest rates mean higher borrowing costs. Following in lockstep with the Fed’s moves are the prices consumers pay to borrow money, whether it’s the price of financing a credit card purchase or the cost of borrowing money on a car loan.
The Fed is purposefully raising borrowing costs. Authorities are trying to calm the overheated post-pandemic economy and resulting inflation.
Fed officials have made some progress in stabilizing prices, but the job is not done yet. Inflation accelerated for the second straight month in August, rising 3.7% from a year earlier.More than half of the increase Due to soaring gasoline pricesAccording to the Bureau of Labor Statistics, it was the largest increase since March.
Overall inflation could become more volatile as food and energy prices fluctuate. But if these price increases continue over an extended period of time, they could cause further headaches for the Fed. Fed Chairman Jerome Powell said households are experiencing the most food and energy inflation, making it a key driver of expectations about future price trends.
Powell also reiterated that a better indicator of underlying inflation is how quickly other prices other than food and energy, so-called “core” inflation, rise. The measure has fallen more than 2 percentage points from its peak, but is still more than twice the Fed’s target and gives Fed officials new reason to remain cautious.
Whether the Fed continues to raise rates this fall will depend on whether core inflation makes significant progress toward its 2% target in the coming months.
— Greg McBride, CFA, Bankrate Chief Financial Analyst
Should the Fed raise rates again? Past experience fuels US central bank hawkishness
Experts say the risk of pulling out too soon and sparking another vicious inflationary spiral remains higher than the risk of doing too much. The Fed failed to sufficiently slow the economy and accelerate inflation in the 1970s, leading to the painful recession of the 1980s.
“The worst thing we can do is fail to restore price stability, because the record is clear on that,” Powell said at a post-FOMC press conference in September. “It can be a disastrous period when inflation continues to pick up and the Fed is forced to step in and tighten again and again.”
The US economy is clearly showing signs of slowing down, but the situation does not seem to be cause for concern. Despite the Fed’s hefty 525 basis point rate hikes since March 2022, unemployment remains at historic lows and employers are well positioned to accommodate a growing workforce. is added. The strong job market is giving workers time to regain some of the ground they lost to inflation, even if their salaries have not yet fully recovered.
Fed officials hope this signals that prices can gradually cool without hurting the job market. But the ultimate concern is that it could contribute to further inflation.
With the job market still strong, personal consumption is the driving force behind the economy. According to statistics, consumption in July increased by 0.8% month-on-month, the fastest pace in six months. Data from the Department of Commerce.
The United Auto Workers (UAW) strike could disrupt the production and distribution of new cars, further increasing pressure on prices.
The Fed has not reached a consensus on whether more rate hikes are necessary, meaning they are not set in stone. But economists argue that suggesting more interest rate hikes is more about giving the Fed a choice.
“It’s important for the Fed to keep all options on the table at this point,” said Tuan Nguyen, an economist at RSM. “All of these meetings will be live, meaning the Fed will have the option to pause or raise rates.”
Investors aren’t convinced the Fed will raise rates again, and some economists agree
Investors aren’t convinced the Fed can follow through on policy. Despite the Fed’s indications that it is open to another rate hike, most market participants still think the Fed’s policy is over, by a large majority, the paper said. Data from CME Group’s FedWatch tool.
So do some of Wall Street’s biggest firms and their economists, from Morgan Stanley to Moody’s Analytics.
One reason the Fed could be in a long-term suspension is simply because the U.S. economy hasn’t yet caught up with interest rate hikes. Experts say it could take a year for the full effects of the rate hike to hit the job market. Recruitment often has to happen last. A year ago, interest rates had just passed the so-called “neutral” rate, the point at which borrowing costs no longer stimulate economic growth.
Some economists say raising interest rates is like driving a car while looking in the rearview mirror. The data is backwards, and the Fed may decide it has done too much to slow the economy when it is too late. Historically, the Fed has not often been able to raise interest rates without causing a recession.
McBride said the recession is “not only a cause for concern, but the outlook is favorable.” “Look at the last three [tightening] Cycles: Two of them ended in recessions, and one had to turn around and start lowering rates. History is not on their side. ”
Another reason to be cautious is that the Fed could continue to squeeze the economy without raising interest rates. The key is often whether the “real” cost of money, or the difference between interest rates and overall inflation, is rising. The Fed’s main benchmark interest rate has been above the inflation rate since May.
“If the Fed continues to raise rates in an environment of declining inflation, it will cause more pain in aggregate demand and more pain in the economy,” said Jordan Jackson, global market strategist at JPMorgan Asset Management. ” he said. “Then there is a risk that the downward trend in inflation will get even worse. … You are in a situation where you could end up in complete deflation.”
Another concern is how much impact student loan repayments will have on the economy. Experts say these payments could be a slight drag on consumption, with estimates suggesting that if borrowers cut their payments on a one-to-one basis, the hit to consumer spending would be between 0.2% and 0.4%. ing. Still, households may find their monthly budgets in a pinch as they simultaneously deal with rising interest rates and soaring prices.
According to a Bankrate poll released in August, nearly one in four student loan borrowers (24%) say taking on too much debt is their biggest financial regret.
Fed officials also note that: Bank failure in March last yearwhich shows that risks can appear out of nowhere and without much notice.
To further balance the risks, the threat of a possible government shutdown could make it difficult for the Fed to track how much these various factors are influencing inflation. Government agencies that produce the Consumer Price Index (CPI), Personal Consumption Expenditure (PCE) Index, and Employment Situation Report will be furloughed until the impasse is resolved.
How the Fed determines the pros and cons of future interest rate trends will depend largely on the FOMC’s perspective and how it decides to weigh the conflicting backgrounds.
“Once we balance the risks and are less worried about an economic slowdown and more worried about inflation remaining high and being incorporated into the price and wage-setting process, we conclude that we need to act sooner. “Maybe,” says Bill English. , a professor of finance at the Yale School of Management, spent 20 years at the Federal Reserve. “Delays will only make matters more difficult because we need to look to the future and determine what the economy will be like.”
5 steps to take with your money when interest rates and recession risk are high
Even if the Fed’s next move is uncertain, it’s still worth preparing for higher interest rates. Further increases mean higher borrowing costs for consumers, including credit cards, personal loans, auto loans, and more. And even if central banks finish raising interest rates, borrowing costs are unlikely to fall unless borrowing standards are lowered.
The highest interest rates in more than 20 years mean money is no longer cheap. In this new era of monetary policy, these are important moves to make with more money.
1. Keep a long-term mindset
Diverging expectations about how the Fed will respond with interest rate policy in coming months could add to market volatility. A sharp decline in stock prices could mean pain for investors, and volatility could be exacerbated by the possibility of a recession or further increases in Fed interest rates. However, don’t give in to market fluctuations and change your approach. Remember, a diversified portfolio and long-term thinking will help you weather the toughest periods in the stock market.
2. Pay off your debts
Consumers with fixed-rate debt, such as mortgages, won’t feel the impact of a Fed rate hike, but those with variable-rate loans, especially if it’s high-interest credit card debt becomes more vulnerable. Thanks to the Federal Reserve’s recent efforts to combat inflation, average interest rates on credit cards are at record highs, according to Bankrate data.
To further reduce your principal balance, consider consolidating that debt with a balance transfer card. Some cards offer borrowers up to 21 months of no interest. But now might be the time to take advantage of it. If the economy worsens, consumers may find it more difficult to get approved for any of these offers. Alternatively, issuers may eliminate those offers altogether.
Homeowners with adjustable-rate mortgages or home equity lines of credit (HELOCs) may want to consider refinancing to a fixed-rate loan. “We can’t sit back and wait for interest rates on credit cards and home equity lines of credit to rise,” McBride says.
3. Increase your emergency savings
With the economic outlook uncertain, now is an important time to carefully review your household finances and find ways to build up your emergency fund if you haven’t already saved up six to nine months’ worth of expenses. Rising interest rates have made it easier for consumers to maintain purchasing power in the face of rising prices, and many online banks now offer yields that are above inflation.
4. Find the best place to store your cash
Savers can earn even more money with their cash by switching to a high-yield savings account. Many accounts on the market offer yields close to 5% to banking consumers. Initially, he deposits $10,000 into an account with a 5% annual percentage rate (APY) and earns $500 in interest, compared to only $49 in interest at the average savings rate of 0.58%.
Consumers who already have an emergency fund may even want to start considering opening a two- or five-year certificate of deposit to lock in that increased yield over time. Yields on savings accounts fluctuate, so banks often cut their own rates without waiting for the Fed to cut rates.
5. Think about finances that can withstand recessions.
Given the many risks facing the Fed, it should always be looking for ways to make its finances recession-proof. In addition to building an emergency fund, experts say you can live within your means, stay connected, identify your risk tolerance, and if you’re an investor, stay focused on your long-term goals. say it’s important.
“The Fed is willing to accept the risk of recession if it can achieve its mission of price stability in order to free individuals, households and businesses from historically high inflation,” said Mark Hamrick, senior economic analyst at Bankrate. Ta. “Choosing the lesser of two evils is no different than a firefighter trading some of the damage caused by water for the damage caused by fire.”
