Will there be another interest rate increase?
As grocery and gas prices fall, the Federal Reserve is expected to leave its key interest rate unchanged on Wednesday, halting a historic streak of hikes that were meant to curb inflation but also threatened to tip the economy into recession.
Still, as the economy continues to send mixed signals, several forecasters say at least one more increase is likely this year as inflation remains high and job growth continues to be strong.
Fed Chairman Jerome Powell has said officials want to assess the lagged effects of the rate hikes on the economy, as well as the impact of deposit runs that triggered the collapse of three regional banks. The banking crisis, he said, has tightened lending standards and could weaken the economy, leaving less work for the Fed.
Fed decision this week
The Fed̵[ads1]7;s interest rate decision will be announced at 2pm ET on Wednesday.
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When is Powell speaking today?
Fed Chairman Jerome Powell’s media conference will begin at 2:30 PM ET on Wednesday. USA TODAY economics reporter Paul Davidson will cover the event in person.
Are we in a recession?
Most top economists say no. Home sales slow and house prices begin to fall due to high mortgage interest rates. Manufacturing activity has also fallen for seven consecutive months, partly because high interest rates have squeezed corporate capital spending.
But consumer spending, which makes up about 70% of GDP, has been surprisingly robust, rising 0.5% in April after adjusting for inflation. And the most important economic indicator, employment, remains strong, with the public and private sectors adding an average of 283,000 jobs each month from March to May. Companies are also keeping employees intact rather than firing them, despite declining sales.
Taking all these factors into account, the bottom line is that the economy is slowing down, but it is not shrinking. GDP grew at a 1.3% annual rate in the first quarter and is forecast to grow 1% in the current quarter, according to S&P Global Market Intelligence.
Fat dot plot
Dot plots are how the Fed indicates the interest rate outlook for the benchmark federal funds index at some Federal Open Market Committee (FOMC) meetings. FOMC members put dots on a chart showing their projections for interest rates in the coming years.
S&P and Nasdaq
Markets were mixed in morning trading as investors awaited the Fed’s interest rate decision. The S&P 500 was up 0.19% and the Nasdaq rose 0.13%, while the Dow Jones Industrial Average (DJIA) fell slightly by 0.27%.
Fed rate hike history
At the Fed’s last meeting in May, the central bank raised interest rates to a range of 5% to 5.25%, the tenth increase in a row.
The steady stream of increases is in stark contrast to the height of the COVID-19 pandemic when rates hovered near zero as the economy virtually ground to a halt. In March 2022, the rate was raised to a quarter of a percentage point. In May, it increased by 0.50 percentage points, followed by four consecutive increases of 0.75 percentage points each.
The last increase in 2022 was half a percentage point.
What is the US inflation rate month by month?
The inflation rate has fallen by more than half from its peak of 9.1% in June 2022. Here’s a look at the US inflation rate by month since May 2022:
- May 2022: 8.6%
- June 2022: 9.1%
- July 2022: 8.5%
- August 2022: 8.3%
- September 2022: 8.2%
- October 2022: 7.7%
- November 2022: 7.1%
- December 2022: 6.5%
- January 2023: 6.4%
- February 2023: 6.0%
- March 2023: 5.0&
- April 2023: 4.9%
- May 2023: 4.0%
Why is the CPI important?
The Federal Reserve is focused on two key elements of the economy: price stability and maximum employment. And those are the most important drivers of interest rate decisions. While the inflation target is roughly 2%, the Fed also takes into account the CPI to determine whether prices are “stable.”
What is CPI?
The Consumer Price Index (CPI) is a measure of the average change in the prices of certain products and services over a period of time according to the Bureau of Labor Services.
Will mortgage rates be affected by the Fed’s interest rate decision?
While mortgage interest rates doubled after the first interest rate increases last year, the most recent increases have had very little effect.
“Every month when the Federal Reserve has raised rates most of the time, the mortgage market has already baked in those rate increases because it’s been very clear what the Federal Reserve was going to do,” says Bright MLS economist Lisa Sturtevant.
Still, anything that introduces uncertainty into the economy can cause mortgage rates to fluctuate.
Housing interest
Mortgage interest rates have developed roughly the same across the board. Here were the average mortgage rates on 13 June:
- 30-year fixed: 7.19%
- 15-year fixed: 6.36%
- 30-year jumbo: 6.84%
The 30-year fixed mortgage rate was 7.19% on Tuesday, down from last week’s 7.24%, according to data from Curinos, but up from last month’s 6.88%. Last year around the same time, 30-year fixed rates were 5.02%, making Tuesday’s rate significantly higher than a year ago.
At the current 30-year fixed rate, you’ll pay about $678 each month for every $100,000 you borrow — down from about $681 last week.
Current Fed Funds rate
In May, the Fed raised its key interest rate to a range of 5% to 5.25%, the highest in 17 years. Since the central bank raised interest rates from near zero in March 2022, the gains have been constant, with the Fed raising rates nine more times to ease inflation that hit a four-decade high in June amid the COVID-19 pandemic. .
Will the Fed cut interest rates?
It is doubtful that the Fed will cut interest rates, according to a Vanguard forecast based on a machine learning model. Although markets predict the Fed will cut interest rates by more than half a percentage point by the end of 2023 based on bond and futures prices, Vanguard senior economist Asawari Sathe says that’s unlikely to happen.
“We think inflation will continue to moderate but remain above 3% through the turn of the year, and the unemployment rate will trend higher to a still reasonable 4.5%,” she said in an investor note. “In that scenario, the Fed is unlikely to cut interest rates this year.”
Vanguard’s model expects the Fed “will not be in a position to cut interest rates until mid-2024,” according to the note.
What is the inflation rate?
Consumer prices rose 4% in May, down from 4.9% the previous month, and a four-decade high of 9.1% last June, according to the CPI. It is the smallest annual increase since March 2021, and on a monthly basis prices rose 0.1% after a 0.4% rise in April.
Although overall price increases have slowed, the Fed is more anxious about core inflation, which remains stubbornly high.
Is the Fed planning to raise interest rates again?
While many expect a divided Fed to take a break on Wednesday from the stream of rate hikes, economists are struggling to reach a consensus on how it will move forward as the economy remains resilient despite continued inflation.
Ahead of the release of a key inflation report on Tuesday, some believed the central bank could roll out a quarter-point increase if the acceleration in prices was stronger than expected. Others said they thought rate hikes were done for the year.
Barclays predicted the Fed could raise interest rates again if more than 200,000 jobs were added to the economy last month and core inflation rose by at least about 0.3%.
Employers blew past this hiring threshold, adding a staggering 339,000 jobs in May. And core prices, which do not count volatile food and energy goods and thus better reflect long-term trends, rose 0.4% for the third month in a row, according to the Ministry of Labour’s consumer price index (CPI).
However, the unemployment rate, calculated from a separate survey of households, rose from a five-decade low of 3.4% to 3.7%, according to the Labor Department, the highest it has been since October. And the annual increase in core prices fell from 5.5% to 5.3%, the lowest since November 2021.
If no rate hike, then what?:It is possible that there will not be an interest rate increase from the Fed in June. But Americans still pay for the last 10
Overall, inflation slowed to 11th right month in May when grocery price increases slowed again and gas more than reversed the previous month’s increase. Consumer prices rose 4%, down from 4.9% in April and a four-decade high of 9.1% in June last year, according to the CPI. It is the smallest annual increase since March 2021, and on a monthly basis prices rose 0.1% after a 0.4% increase in April.