The Fed Raises Interest Rates to Highest Level in 22 Years

On July 23, 2023, the Federal Reserve (Fed) raised interest rates a quarter of a percentage point in an ongoing attempt to combat inflation. This increases the federal funds rate from a target range of 5.25% to 5.5%, the highest level in 22 years. Although recent data shows that inflation is slowing, it remains higher than the Fed’s target rate, indicating another rate hike is possible in September or November.

Federal interest rate hikes impact the rate banks charge each other for overnight lending. They also impact borrowing costs for customers and businesses, credit card rates, adjustable-rate mortgages and personal and auto loan rates, which are all expected to increase with the recent decision. Conversely, the recent rate hike is projected to increase bank savings yields and interest income for retirees.

Inflation Rates Have Improved but Remain High

The consumer price index (CPI) is at 4.8% when food and energy costs are excluded, a 0.2% increase from May and a 3% increase from last year. This is a marked improvement from 12 months ago when the CPI was 9.1%. However, the core personal consumption expenditures price index rose 4.6% for May. While these numbers are above the worst inflation levels, they’re still above the target 2% rate set by the Fed.

Market Projections

Despite the recent string of rate hikes, the chairman of the Fed, Jerome Powell, acknowledged that the economy continues to grow as Americans continue spending and organizations keep hiring. Powell also revealed that Fed staff economists no longer predict a recession, an improved outlook from the central bank’s March meeting in which a “mild” recession was expected.

“Given the resilience of the economy recently, they (staff economists) are no longer forecasting a recession,” said Powell.

Conclusion

In June, policymakers indicated the potential for two more rate hikes this year. However, following the Fed’s most recent rate hike, Powell has suggested that a rate hike may or may not occur in September. This is a variation from previous instances in which rate hikes were widely anticipated, indicating that the Fed may be considering adopting a less aggressive strategy as inflation data improves.

Individuals should continue to monitor the economy and associated inflation trends, adjusting their financial habits accordingly. Check with your manager for financial and mental wellness benefits and related resources.

We will keep you updated with any notable changes.