Fed’s Rate Hikes: What Does it Mean for You?
By The Federal Reserve is widely expected to raise interest rates by a quarter-point at their meeting this week, further slowing what had been an aggressive pace of rate increases in 2022 as they wait to see how swiftly inflation will fade. The central bank has signaled that it intends to raise the fed-funds rate above 5% and keep it there for some time as it looks to quash inflation. Traders in the money-market have taken into account the likelihood of rate cuts occurring before the end of the year.[0]
The Fed will raise rates to a level “somewhere above 5%,” making rates “sufficiently restrictive.” In his press conference, Jerome Powell, the Chair of the Federal Reserve, will be tasked with persuading markets that rates will stay elevated for an extended period, which is something Fed officials have often brought up.[1] It is expected that Federal officials will approve a 0.25 percent increase in this instance, as inflation starts to wane, which is a much slower pace than the large-scale increases seen in 2022.[2]
Since March of 2022, the Federal Reserve has hiked interest rates by 4.25 percent, after keeping them at a low of 2 percent since 2008. Has the Federal Reserve chosen the correct approach in employing a series of measures to contain inflation?[3] Economists are worried that the Federal Reserve's policy, based on overly pessimistic inflation forecasts, could lead to a rise in interest rates that is so high or lasts so long that it will cause a recession in the United States.[4]
Industry leaders currently anticipate that the Fed will stop increasing interest rates, assuming that the economy can recover with the break it has been given and absorb the effects of the hikes that have taken place over the past year.[5] According to Ryan Swift, a U.S. bond strategist at BCA Research, it is anticipated that there will be two quarter-point increases in rates followed by a pause.[1] With the market pricing in 55 bps of rate cuts in the second half, he said, “bond yields have some upside in a positive economic scenario.”[1]
Investors have been heartened by signs that inflation is on a downswing and, coupled with expectations for a recession sometime this year, widely see the Fed shifting from rate hikes to rate cuts by the end of this year.[6] Here's what the Fed's interest rate hike means for you: the Fed must carefully weigh the risks of recession against a jubilant market.[7]
0. “Treasury yields climb ahead of this week's Fed meeting” MarketWatch, 30 Jan. 2023, https://www.marketwatch.com/story/treasury-yields-climb-ahead-of-this-weeks-fed-meeting-11675084536
1. “Analysts agree: 25 bp Fed hike as rates will stay higher, longer” Bond Buyer, 30 Jan. 2023, https://www.bondbuyer.com/news/analysts-agree-25-bp-fed-hike-as-rates-will-stay-higher-longer
2. “The Federal Reserve Likes to Keep Inflation at 2%. But Will We Ever Get Back There?” The Motley Fool, 26 Jan. 2023, https://www.fool.com/the-ascent/personal-finance/articles/the-federal-reserve-likes-to-keep-inflation-at-2-but-will-we-ever-get-back-there/
3. “The Federal Reserve Keeps Hiking Interest Rates. Is It Helping?” ValueWalk, 26 Jan. 2023, https://www.valuewalk.com/the-federal-reserve-keeps-hiking-interest-rates-is-it-helping
4. “Key US Inflation Gauge Seen Slowing But Leaving Fed Wanting More” msnNOW, 25 Jan. 2023, https://www.msn.com/en-us/money/markets/key-us-inflation-gauge-seen-slowing-but-leaving-fed-wanting-more/ar-AA16JlPu
5. “Yields Bounce on Monday as Expectations for Interest Rate Hike Heightens” Coinspeaker, 30 Jan. 2023, https://www.coinspeaker.com/yields-bounce-interest-rate-hike
6. “Why Investors Should Brace for a Tough-Talking Fed This Week” Morningstar, 27 Jan. 2023, https://www.morningstar.com/articles/1133902/why-investors-should-brace-for-a-tough-talking-fed-this-week
7. “The Federal Reserve is likely to hike interest rates again. What that means for you” CNBC, 30 Jan. 2023, https://www.cnbc.com/2023/01/30/federal-reserve-likely-to-hike-interest-rates-again-how-to-prepare.html
