Investors and analysts eagerly await the Federal Reserve’s decision at its June meeting. Will the Fed raise rates for the 11th time? Read on for our take.
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On Wednesday, the Federal Reserve will be meeting to determine whether to raise rates for the 11th consecutive time. Last month, interest rates were raised to a target range of 5%-5.25%, the highest since 2007. After 14 months of interest rate hikes, the Fed is expected to “pause” and maintain the current rate. By taking this step, policymakers will have more time to explore their options and determine the best course of action moving forward.
How high will rates go?
The Fed Chair, Jerome Powell, has stated that decisions will be made on a meeting-by-meeting basis. 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.
The upcoming decision is being referred to as a “skip” as opposed to a “pause.” For the first time since the rate hikes began, policymakers are split. Some officials believe that they should halt the rate hikes for now and observe the situation before finalizing a decision.
Meanwhile, another group is concerned that inflation is already at an unacceptable level and suggests continuing with at least one or two more hikes, starting from next week’s meeting. The “skip” is a compromise to help provide a consensus.
The clearest signal that a skip, rather than a pause, is in the works will likely be seen in the quarterly economic projections that policymakers will issue Wednesday. Those may show that officials expect their key rate to rise a quarter-point by year’s end. This will bring it up to about 5.4%, surpassing the estimate provided in March.
High interest rates are impacting consumers
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 6.8% currently. Compared to last year, the sales of existing homes have dropped by almost a quarter.
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 also become more expensive, as the average rate on a five-year loan increased from 4.5% in early 2020 to 7.5% in the first quarter of 2023.
It is clear that the Fed is keeping a close eye on inflation and the global economy, which will undoubtedly factor into its future decision-making. Regardless of whether it’s a skip or a pause, many consumers may welcome the break from higher costs. The Fed has the difficult task of balancing out stubbornly high inflation and avoiding an economic recession. As new data on the economy is released, the Fed will continue to keep a watchful eye on things and determine steps for the rest of the year.
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