Many Americans are feeling the pinch of much higher interest rates, the result of nine consecutive Federal Reserve rate hikes since March 2022, which have made everything from mortgages to credit card debt credit, be more expensive.
Now, as the Federal Reserve meets Wednesday to discuss its next move, economists, investors and consumers are wondering whether more rate hikes are on the way or whether the central bank could say it’s done, at least for now, with further hikes . .
Here’s what the experts say.
what’s happening this week
On Wednesday, the Federal Reserve is expected to raise its benchmark interest rate for the 10th straight hike since March 2022 as part of its campaign to moderate the highest inflation in four decades.
The central bank is expected to raise its benchmark rate to a range between 5% and 5.25%, reflecting an increase of 0.25 percentage points, according to economists polled by the financial data firm FactSet.
This would reflect a 16-year high, as well as a rate that would be 5 percentage points higher than in March 2022.
Chart of Fed interest rate hikes
In dollar terms, every 0.25 percentage point increase in the Fed’s benchmark interest rate translates into an extra $25 a year in interest on $10,000 of debt.
The Fed’s target range in March 2022, when it began its rate hike regime, was 0.25 to 0.5 percentage points. If the central bank raises its target rate to between 5% and 5.25%, borrowers will pay up to $500 more in interest each year on every $10,000 of debt.
Have rate hikes affected the economy?
Yes, because they have made it more expensive to borrow money. Mortgages, auto loans and credit cards have all raised rates in response to the Fed’s higher benchmark rate. The jump in mortgage rates has slowed home buying and kept some house hunters out of the market.
The surprisingly resilient labor market, which has kept the unemployment rate near 50-year lows for months, is now showing some cracks. Hiring has slowed, job openings have dwindled, and fewer people are leaving their jobs for other, usually higher-paying positions.
Higher interest rates have also affected the banking sector. Silicon Valley Bank and First Republic failed after spooked depositors pulled money out over worries about banks’ balance sheets. In SVB’s case, this was partly because higher interest rates caused the value of the bank’s investments to decline, leading to losses and raising fears among depositors about its stability.
How do rising interest rates help inflation?
Higher interest rates are the Federal Reserve’s most powerful tool to fight inflation, primarily because they make it more expensive to borrow money, acting as a drag on economic activity, such as buying homes, cars or expand a business.
When spending cools, there is less incentive to raise prices, which can help keep inflationary pressures in check.
So far, economists say there is evidence that the Federal Reserve’s rate hikes are having an impact on inflation, which has eased from an annual rate of 9.1% in June 2022, a 40-year high. a 5% in March.
Will the Fed take a breather?
That’s the big question on economists’ minds, especially since there are persistent signs of weakness in the banking sector, which is particularly sensitive to rising interest rates.
For example, First Republic Bank was reeling for weeks before it was confiscated early Monday by regulators, who then accepted a bid from banking giant JPMorgan Chase for nearly all of its assets. The First Republic had been weakened by massive outflows of deposits due to concerns about its financial strength.
In the wake of the collapse of the First Republic, there are concerns of a “contagion” effect, with fears growing about the strength of smaller banks that have a large exposure to uninsured deposits, making them more vulnerable to bank runs .
At the same time, inflation remains well above the Federal Reserve’s 2% target. With these conflicting trends, investors and economists eagerly await the Fed’s Federal Open Market Committee [FOMC] comments Wednesday to find out what may come next for interest rates.
“Beyond May, we expect the FOMC to hold rates steady for the rest of the year, although several paths are possible, depending very much on how badly banking stress affects the economy,” he said. Goldman Sachs economist David Mericle in a research report.
But some experts aren’t so sure the Fed will relax, especially as inflation remains higher than the central bank would like. Even if the Fed signals a pause in rate hikes, it still may not cut rates in 2023, some experts say.
“The Fed will be very data-driven. They want to maintain financial stability, while tightening financial conditions to reduce inflation,” Joe Davis, chief global economist at Vanguard, said in an emailed note. “More important than the terminal rate is our view that the Fed will not cut in 2023.”
With the Associated Press report.
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