The Federal Reserve's interest rate policy has been a topic of much debate and speculation in recent months, with many people asking, “when will Fed raise rates again?” With the US economy showing signs of strength, inflation rising, and concerns about the stability of the banking sector, the Fed's decision regarding the next rate hike will have a significant impact on the economy. In this article, we will examine the current economic conditions that may influence the Fed's decision, the potential risks of a rate hike, and what experts predict for the next Fed rate hike.
The Federal Reserve hiked the fed funds rate by a quarter-point in March 2023, bringing the current target range to 4.75-5 percent. While Fed policymakers are taking a slower approach to interest rate hikes this year, there is still uncertainty about how many more hikes can be implemented before the economy faces challenges. Some experts cite recent bank failures as a warning sign of the risks associated with rapidly increasing inflation and interest rates. Despite this, Fed officials project at least one more rate increase this year, with some projecting up to four more hikes.
When is the Next Fed Interest Rate Decision?
The Federal Reserve has been increasing interest rates for the past year, but the big question on everyone's mind is when will they raise rates again in 2023? As we approach the Fed's meeting on Wednesday, May 4, economists, investors, and consumers are all speculating whether more rate hikes are in store or if the central bank could pause for now with additional increases.
The upcoming May meeting of the Federal Reserve has attracted investor interest as expectations of another interest rate increase grow. The Federal Open Market Committee (FOMC), responsible for setting interest rates and making monetary policy decisions, is expected to deliver its third quarter of a percentage point rate increase to control inflation without sending the US economy into a recession.
It is expected to raise its benchmark interest rate for the 10th consecutive time since March 2022. The central bank is expected to boost its benchmark rate to a range between 5% and 5.25%, reflecting an increase of 0.25 percentage points. This would be a 16-year high and a full five percentage points higher than in March 2022.
Every 0.25 percentage-point increase in the Fed's benchmark interest rate translates to an extra $25 a year in interest on $10,000 in debt. If the central bank pushes its target rate to between 5% to 5.25%, borrowers would be paying as much as $500 more in interest each year for every $10,000 in debt.
The collapse of the Silicon Valley Bank in March tightened credit market conditions, which is expected to help the Fed bring down inflation. The bond market is currently pricing in an 86% chance of another quarter of a percentage point rate hike, which would bring the federal funds target rate to a range of between 5.0% and 5.25%.
According to CME Group, there is only a 14% chance that the FOMC will choose not to raise rates in May, and ironically, a 65.8% chance that the Fed could cut rates to between 4.5% and 4.75% by the end of 2023. Despite the rate hikes, traders anticipate a soft landing for the economy, which means inflation is back to normal and no recession.
The Fed is also expected to continue its policy of quantitative tightening. The Federal Reserve’s balance sheet has dropped from a record high of $8.96 trillion in May 2022 to around $8.6 trillion, but it remains more than twice its pre-pandemic size of $4.15 trillion in late February 2020.
According to the latest US Labor Department reports the labor market remains resilient despite the inverted US Treasury yield curve, a downturn in corporate earnings, and a cooling housing market that could lead to a recession. The US economy added 236,000 jobs in March, just shy of expectations.
Average US wages were up 4.2% from a year ago, and the unemployment rate held steady at 3.5%, while the labor participation rate continued to rise to 62.2%. However, there are warning signs that the labor market will cool down in the coming months. Tight credit markets mean that fewer small businesses are planning to expand, which suggests that the labor market will slow in the coming months.
Fortunately, the rate hikes seem to be having a real impact on inflation. In April, the Commerce Department reported the Consumer Price Index (CPI) was up 5% year-over-year in March, a significant reduction from its 6% annual gain in February. Core CPI, which excludes volatile energy and food prices, was up 5.6% from a year ago.
Chris Zaccarelli, Chief Investment Officer at Independent Advisor Alliance, said the latest inflation numbers suggest the Fed still has work to do. The FOMC is expected to continue with its third quarter of a percentage point rate increase, bringing the federal funds target rate to a range of between 5.0% and 5.25%.
The Fed is expected to continue its policy of quantitative tightening, allowing up to $60 billion in Treasury securities and $35 billion in agency mortgage-backed securities (MBS) to mature and roll off its balance sheet each month. Despite the Fed's efforts, the latest US Labor Department reports show that the labor market will likely cool down in the coming months. Nevertheless, the rate hikes seem to be having a real impact on inflation.
Next Fed Rate Hike: Fed Meetings Calendar 2023 (Source FOMC)
The Federal Reserve has released its 2023 meeting calendar, which includes eight scheduled meetings. These meetings are crucial as they set monetary policies that impact the entire economy. The first meeting of the year took place on January 31 and February 1. It will be followed by meetings in March, May, June, July, September, October, and December. During these meetings, the Federal Open Market Committee (FOMC) will discuss various factors affecting the economy, including inflation, employment rates, and GDP growth, to make informed decisions about the direction of interest rates.
| Date | Interest Rate Hike |
|---|---|
| January 31 to February 1 | 25 basis points |
| March 21 to 22 | 25 basis points |
| May 2 to 3 | – |
| June 13 to 14 | – |
| July 25 to 26 | – |
| September 19 to 20 | – |
| October 31 to November 1 | – |
| December 12 to 13 | – |
The increase in interest rates has had a significant impact on the economy, making it more costly to borrow money. Mortgages, auto loans, and credit cards have all experienced higher rates in response to the Federal Reserve's elevated benchmark rate. This surge in mortgage rates has dampened home buying, pricing out some house hunters. Furthermore, the banking sector has been negatively impacted by the increased interest rates, with some banks facing failure due to depositors pulling money over concerns about the banks' balance sheets.
However, higher interest rates serve as the Federal Reserve's most potent tool for combating inflation as they make borrowing money more expensive, slowing economic activity. When spending decreases, there is less incentive to raise prices, which can help control inflationary pressures. To date, there is evidence that the Federal Reserve's rate hikes have had an effect on inflation, which dropped from a 40-year high of 9.1% in June 2022 to 5% in March.
Despite the banking sector displaying weaknesses and inflation remaining above the Federal Reserve's 2% target, some experts believe that the Fed will maintain current interest rates for the remainder of the year. However, the state of the economy will be a determining factor.
Impact of Fed Rate Hikes
The Fed Rate hikes have led to issues that are disrupting the banking industry, causing a crisis of confidence in the financial sector. For consumers, this means they have to pay a higher price to borrow while suffering from a persistently high cost of living.
Incomes have not kept pace with inflation, so households' purchasing power has declined. The rate hikes have led to increased credit card rates and household debt, making it harder for borrowers carrying balances from month to month. Furthermore, the rising mortgage rates have resulted in a loss of purchasing power for homebuyers, and adjustable-rate mortgages and home equity lines of credit are pegged to the prime rate.
Car prices are also rising, with the average interest rate on a five-year new car loan increasing from 4% to 6.48%. Federal student loan rates have already risen to 4.99%, with private student loans likely to follow. While deposit rates at banks have gone up, money earning less than the rate of inflation still loses purchasing power. The hike may be an effort to curb inflation, but it is causing a significant impact on the economy and the housing market.
The rate hike will lead to higher borrowing costs, which will significantly impact the housing market. According to CNBC, “Higher borrowing costs could take a toll on the housing market. For one, higher mortgage rates mean buyers can afford fewer houses. It could also lead to fewer sales if potential buyers decide to sit on the sidelines or are priced out altogether.” The hike will affect home buyers who were already struggling with the rising prices of homes. In addition, adjustable-rate mortgages and home equity lines of credit will be affected, which may cause homeowners to face financial difficulties.
The rate hike may be a move by the Fed to curb inflation, but it has also created unintended consequences that are causing disruptions in the banking industry and negatively impacting consumers. With higher borrowing costs and a persistently high cost of living, households' purchasing power has declined, leading to increased credit card rates and household debt. Car prices are also rising, and student loan rates have already increased, with private student loans likely to follow.
In the housing market, the rate hike is expected to lead to fewer sales as potential buyers are priced out or decide to wait on the sidelines. Higher mortgage rates also mean that buyers can afford fewer houses, which will impact homebuyers who were already struggling with rising home prices. Homeowners with adjustable-rate mortgages and home equity lines of credit will also face financial difficulties.
Overall, while the rate hike may have been intended to address inflation, it has created significant economic and financial impacts that are negatively affecting consumers and industries. The Federal Reserve will need to carefully balance its monetary policy decisions to address inflation while minimizing the negative impacts on the economy and financial sector.
Sources:
- https://www.bankrate.com/banking/federal-reserve/fomc-what-to-expect/
- https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
- https://www.forbes.com/advisor/investing/fed-meeting-preview/
- https://www.cnbc.com/2023/03/20/federal-reserve-expected-to-hike-rates-again-what-that-means-for-you.html
