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Menflation is starting to ease, but we don’t expect rates to ease yet.
On Wednesday, the Federal Reserve raised its benchmark interest rate for the eighth time since March.
The 0.25 percentage point rate hike is less aggressive than December’s 0.5 percentage point hike. Before that, the Fed announced his 0.75% rate hike for the fourth time in a row. The move will push interest rates between 4.5% and 4.75%, the highest level in 15 years.
The pace of the correction has slowed, but Fed officials are signaling further rate moves. “We will maintain this policy until the job is done,” Fed Chairman Jerome Powell said at a news conference. “We are talking about a few more rate hikes,” he said. He added that he did not expect the Fed to cut rates in 2023 as signs of a recent slowdown in inflation were in the “early stages.”
The announcement initially sparked mixed reactions in the market, but by 3pm Wednesday, all major U.S. stock averages had risen. The S&P 500 rose 1% for him, and the Dow Jones Industrial Average rose a more modest 0.05% for him.
For borrowers, higher interest rates mean paying more on credit cards, student loans, and other types of floating rate debt. It asserts that if the Fed does not continue to fight inflation by making it more expensive to borrow money, price spikes could accelerate again and require even more painful measures in the future.
William English, a senior economist at the U.S. Federal Reserve and a professor of finance at the Yale School of Business, told Time magazine before Wednesday’s announcement that the Fed would keep interest rates stable. And I think we’re getting close to the point where we don’t want to continue raising them.” “They’ve been catching up for a while, but they’re probably pretty happy with how things are playing out and want to avoid making any big changes to the policy outlook at this stage.”
Federal Reserve Challenge
Since the Fed’s last rate hike, inflation has come down significantly and consumer spending has started to fall. This shows that the economy is performing as expected of his Fed. Inflation in December fell to 6.5% from 7.1% in November a year ago, and its most recent peak was 9.1% in June, according to the latest consumer price index data. . But many economists and Wall Street investors fear the Fed will raise interest rates too high for too long, putting the economy at risk of a deep recession.
“The Fed is very close to saying they won the battle and dealt with the inflation problem,” said Jeffrey Roach, chief economist at LPL Financial. We must remember that the other half of is growth.”
In December, Fed officials expected rates to rise to just over 5% in 2023 and remain elevated throughout the rest of the year. Economists and Wall Street investors were paying particular attention Wednesday to how Federal Reserve Chairman Jerome Powell debated what happened next.
US Federal Reserve Chairman Jerome Powell attends a press conference in Washington, DC, USA, December 14, 2022.
Liu Jie––Xinhua via Getty Images
Many Fed officials favor smaller rate hikes to give them time to assess the impact of the policy given all the uncertainty about how the economy will react.Dallas “If you encounter fog or a dangerous highway during your road trip, it’s a good idea to slow down,” said Laurie Logan, president of the Federal Reserve and former New York Fed official. , in a speech earlier this month. “The same is true if you are a policy maker in today’s complex economic and financial environment.”
Still, the Fed’s long-term prospects are currently uncertain. “It’s hard to tell whether high interest rates will continue,” says English. “It’s very difficult to coordinate monetary policy very precisely, and they’re doing all they can, but there’s a lot of uncertainty about what interest rates will be in a year out.”
Higher interest rates mean it’s more expensive to borrow money, which economists say should delay both big purchases and new jobs. remains very strong, with the unemployment rate at 3.5%, the lowest in half a century. Moreover, wages for many workers are rising, and a strong job market could signal a reacceleration of growth and inflation, putting the Fed in a difficult situation.
“There are big concerns that a tight labor market will push up wages,” says Roach. “As wages rise, aggregate demand and price pressures in the economy also rise.” is one of the reasons why
Why the Fed Continues to Raise Rates
The Federal Reserve hopes that rate hikes will soften demand for consumer goods and services by making it more expensive to borrow money. The philosophy is that there are fewer and sellers need to lower their prices to keep customers. For example, car dealers may be forced to lower the price of new cars if potential buyers are unwilling to pay additional interest on a car loan.
It sounds like a simple formula, but it’s actually more complicated. The Fed expects to keep inflation down to around 2%. The problem is that the Fed doesn’t have many tools to achieve that goal. Rising interest rates also make it harder for businesses to grow, making it more expensive for Americans to buy homes, cars, and other big-ticket items.
Bankrate chief financial analyst Greg McBride said, “Without rate hikes, inflation could take hold. That’s a problem.” He added that the Fed put the brakes on interest rate increases in the 1970s and inflation soon returned. It took tougher steps to put inflation in the rearview mirror, but at a very high price that could have been avoided if inflation had been fully addressed., seven years earlier.
“I don’t know this rate hike is a difficult decision,” McBride said. “I think the tough decisions are yet to come. I mean, at what point will you stop raising rates?
Impact of High Interest Rates on Credit Cards and Other Debt
Rising interest rates can have many implications for borrowers, many of which are intolerable. Those with credit card debt should prepare for more interest rate shocks in the coming months, as most credit cards have floating rates and the Federal Funds Rate will also rise.
According to Bankrate, the average credit card rate is currently 19.93%, the highest ever. By comparison, the average credit card interest rate he was around 16.3% at the beginning of 2022. Rising credit card interest rates have already put a strain on the growing number of borrowers who are maintaining monthly balances because their income has not decreased. caught up with inflation.
McBride advises cardholders with debt to consider transferring their balances to lower interest rate options such as 0% interest balance transfer cards. He also says cardholders should refrain from making additional purchases on their credit cards unless they have enough money set aside for other expenses to pay the balance in full at the end of the month.
Buying a home can also be more difficult for some home shoppers. Mortgage rates don’t exactly match Federal Funds rates, but they are heavily influenced by central bank policy. Whenever the Fed raises its benchmark interest rate, variable mortgage rates tend to follow suit. That means people who buy new homes in early 2023 may continue to make significantly more mortgage payments than they did a year ago.
The weekly average for 30-year fixed-rate mortgages is now at 6.4%, down from a mid-November peak of 7.08%. However, the percentage is still relatively high, and the purchasing power of homebuyers has declined considerably.
Those looking to finance a car should also plan to pay more, as the Fed rate hikes will increase the interest cost on new car loans. Currently, his five-year new car loan rate is 6.18%, up from 3.96% for him in early 2022. Car shoppers with higher credit scores may be able to: Get better loan terms.
But there are some lights for consumers. The recent series of rate hikes may have pushed up the interest consumers earn on their cash savings. Some online savings accounts he touts interest rates as high as 4.35%, but certain certificates of deposit may offer higher interest rates.
“Savings are finally paying off,” says McBride. “With interest rates still rising and inflation falling, savers now get the best of both worlds. So it’s a double win for savers.”
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