Fed raises interest rates by 25 BPS to ease inflation concerns

As expected, the Fed has scaled back its rate hikes, unanimously saying on Feb. 1 that it will raise rates by a quarter of a percentage point at its first meeting in 2023.

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While this slowdown is welcome, it still does not fully represent a dovish turn, as a Fed official said in a statement that “inflation has eased somewhat but remains elevated.” not. This latest minimal rate hike follows his 50bps rate hike in December and his 75bps rate hike for the fourth time in a row.

“Today’s rate hike confirms the market view that the Fed expects inflation to ease, but we are not out of the woods yet,” said Ben Vaske, investment research analyst at Orion Advisor Solutions. I’m here. “Increasing attention is now [Feb. 2’s] We expect the job report to provide further evidence that the tightening is having its intended effect. ”

The Federal Open Market Committee (FOMC) of the Federal Reserve Board said in a statement on February 1 that it had decided to increase the target range for the federal funds rate from 4.5% to 4.75%. “The Committee expects continued increases in the target range to be appropriate to achieve a sufficiently restrictive monetary policy stance to bring inflation back to 2% over time.” added.

Michele Lanelli, Vice President of U.S. Research and Consulting at TransUnion, said the decline in the second rate hike in a row is evidence that the Federal Reserve is making significant progress in containing inflation and that more rate hikes are likely. said he had reached a point where Shrink.

Notably, FOMC officials noted that “in determining the extent of future increases in the target range, the committee will consider the cumulative tightening of monetary policy, the delay that monetary policy will have on economic activity and inflation, and It takes economic activity into account,” he said. and financial developments” – change of wording from “pace of increase” to “magnitude of increase”.

Jeffrey Rosencrantz said: “Discussing the still plural ‘s’ at the end of ‘ongoing increase’ and the nuance of replacing ‘pace’ with ‘extent’ of future rate hikes is absolutely problematic. No,’ he said. , his manager of the Shelton Capital Management portfolio. In fact, there is not yet enough clear evidence that inflation is trending downward, he added, adding that the job market remains very tight, which puts sustained pressure on the service sector. pointed out that

“All of the cumulative tightening should start to eat into that labor market, and there are some hopeful early indicators such as drastic reductions in temp jobs, working hours, or hourly wages,” Rosencrantz said. said. “But in the end, the Fed overcorrects to get the job done perfectly, worrying about cleaning up the mess later. I’m frustrated that it’s getting more complicated.”

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Bill Adams, chief economist at Comerica Bank, said the wording change has two big implications. Second, the Fed is still steering expectations towards a final rate of at least 5% to 5.25% rather than the 4.75% to 5% range that the market sees as the peak of recent weeks. ”

How will this new rate hike affect you?

According to CreditCards.com senior industry analyst Ted Rossman, 25 bps was expected, but it’s the cumulative effect that matters most to consumers. The Fed has now raised the Federal Funds Rate by 450 basis points since last March.

As a direct result, average credit card interest rates in 2022 are higher than in any previous year. The current national average is 19.95% for him, Rothman said, which is the first time he’s exceeded 20% since tracking began in 1985.

“Many people are seeing credit card rates even higher than the national average. With most credit card structures, if the Fed raises 450 basis points, interest rates will be 450 basis points higher. It’s very likely,” he said. “If you had $5,000 in credit card debt and paid the 16.3% minimum payment, you would remain in debt for 185 months and pay $5,517 in gross interest. If was 450 basis points higher (20.8%), the total payoff time would be 195 months and the total interest expense would be $7,224.”

Rothman added that this is why prioritizing paying off credit card debt is so important. “These interest rates are much higher than most other financial products. Our top tip is to sign up for a 0% balance transfer card, which will keep your interest clock up to 21 months. You can pause,’ he said.

Transunion’s Llanelli said that while interest rate hikes have slowed, consumers are likely to continue to feel the double-edged effects of continued inflation and high interest rates for at least some time.

“They may seek to eliminate high-interest debt through personal loans and other low-interest loan products. You can look to HELOCs and HELOANs to reduce higher interest rate debt and improve your monthly cash flow.

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Finally, some experts argued that the Fed should say more at its March meeting, including economic forecasts.

“The Fed has punted with a nothing statement. The March meeting is more important because it gives us another dot plot,” said David Russell, vice president of market intelligence at TradeStation Group. . “By then, we’ll have two CPI and payroll reports, and congressional testimony. We still have a lot of data before policymakers take a stand. Powell is keeping his options open. He If they want to pivot, they have plenty of time before March.”

He added that while the news continued to improve as wage inflation eased and oil fell in the fourth quarter, “we are still in wait-and-see mode.”

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