Will the Fed Raise Rates for the Last Time?

All 106 economists polled by Reuters agree that the U.S. Federal Reserve will increase interest rates by 25 basis points to the 5.25%-5.50% range on July 26. The majority of economists believe this anticipated increase will mark the end of the current tightening cycle.

Economy is still strong

The economy has proven to be strong and unemployment remains at historically low levels, surprising analysts and investors alike.

Inflation is decreasing, with the Consumer Price Index (CPI) declining from 4.0% in May to 3.0% in June. This has led experts on Wall Street to believe that inflation could be controlled in the near future, sparking speculation about potential rate cuts by the end of 2023.

However, Fed Chair Jerome Powell and other central bank officials have emphasized the need for further tightening, despite their recent decision to pause rate hikes at the June meeting.

The ongoing discussion revolves around whether further rate increases are necessary to maintain the trend of decreasing inflation or if taking extra measures could have adverse effects on the economy.

How high will rates go?

While all 11 voting members of the Fed agreed unanimously to pause on hiking rates in June, the minutes from the meeting reveal that certain officials advocated for a quarter-point rate hike or expressed their willingness to support such a proposal.

In fact, some signaled that they might raise rates twice more this year, beginning as soon as this month. The most recent projections from the Federal Open Market Committee, which sets policies for the central bank, indicate that the benchmark overnight interest rate will likely reach a peak of 5.50% to 5.75%. However, only 19 out of 106 economists surveyed by Reuters believe it will actually reach this range.

The belief that the Federal Reserve is nearing the end of its cycle of raising interest rates has caused the value of the dollar to decline against other major currencies, reaching its lowest point in over a year. Powell has stated that future decisions will be made on a meeting-by-meeting basis.

High interest rates are impacting consumers

The Fed has increased the benchmark rate by 5 percentage points over a span of 14 months, making it the most substantial pace of increases in 40 years. As a result of the rate hikes, mortgage rates have surged, resulting in a drastic decline in home sales. The average rate for a 30-year mortgage has almost doubled, rising from 3.8% in March 2022 to 6.78% currently, per Freddie Mac. The National Association of Realtors found that the sales of existing homes have dropped by almost 20% compared to last year.

Credit card interest rates have also experienced a significant increase, averaging over 20% nationwide, up from 16.3% before the Federal Reserve's rate hikes. Auto loans have become more expensive as well, as the average rate on a five-year loan increased from 5% in early 2020 to 7.81% in the first quarter of 2023.

The Federal Reserve is closely monitoring inflation and the global economy, which will definitely influence its future decision-making. This balancing act involves addressing persistent high inflation while preventing an economic downturn. As new economic data becomes available, the Fed will continue to assess the situation and determine the best course of action for the remainder of the year.