Will the Fed raise interest rates again in 2023? Fed chief opens the door to even higher borrowing costs

The Federal Open Market Committee (FOMC) raised interest rates in July for another quarter point, increasing the target range for marks by 5.25-5.5 percent, based on the decision made in the 12th meeting.

A year ago, energy and food prices, excluding inflation, have increased by 4.8 percent. The Federal Reserve’s target price increase of 2 percent has continued to affect the cost of dining out in restaurants and rental prices. Some key household items, such as pet food and car repair services, are still experiencing double-digit price hikes. However, it is important to consider how other prices, like masks, contribute to the overall measure of inflation. In June, inflation rose by 3 percent compared to the slowest pace since August 2021. While this news is not entirely positive, officials at the Federal Reserve are seeing some progress in stabilizing prices.

Nowhere can inflation shocks exacerbate another major concern, which is the outcome of energy and food. However, Jerome Powell, the Chair of the Federal Reserve, has stated that most households experience inflation in energy and food, indicating an overall trend in prices.

Following Russia’s strategic focus on a crucial Ukrainian port, the cost of wheat surged to its highest point in five months. In the midst of closures at an oil refinery facility, statistics provided by AAA indicate that gasoline prices increased by nearly 4 percent exclusively during the transition from the third to the fourth week of July.

Experts say that if the Fed has been able to raise interest rates by a whopping 525 basis points in just 16 months, it runs the risk of harming the job market and starting another vicious inflation spiral by pulling back too soon, which could result in even higher risks.

Based on information from the Department of Commerce, the economy of the United States expanded by 2.4 percent in the second quarter of 2023, propelled by consumer expenditure and accompanied by a revived sense of confidence among investors and more relaxed financial circumstances. The Department of Labor’s report, which indicated a decrease in job creation to its lowest rate since the pandemic and a decline in the unemployment rate, has reignited hopes of a smooth economic transition. As of June, policymakers are still contemplating a potential increase in interest rates, as suggested by the median forecast of officials; however, this also implies that officials are not yet prepared to commit to their forthcoming actions.

Officials will have two additional insights into the current state of hiring and inflation prior to the upcoming meeting in September.

“At that gathering, we would opt to maintain stability. Additionally, there is a chance that we may increase [rates] once more during the September gathering, provided that the data justifies it,” Powell expressed during the Federal Reserve’s press conference held after the July meeting. “Our decision leading up to that gathering will shape all of the information we possess.”

The FedWatch Group assumes that the Federal Reserve will raise interest rates by more than one percent, peaking in the range of 5.5-5.75 percent. This estimate is based on the average forecast of economists in Bankrate’s second-quarter Economic Indicator poll.

Officials have three remaining meetings this year from September to December.

According to Tuan Nguyen, a economist at RSM, “Currently, it is crucial for the Federal Reserve to consider all possible courses of action.” “The Federal Reserve will be able to choose between pausing or increasing rates, which means that all of those meetings will be active and responsive.”

Rising prices would influence the Federal Reserve’s choice to continue increasing interest rates.

In March of this year alone, there has been an increase from a 3.6 percent forecast. The average prediction among officials suggests a 3.9 percent core inflation rate, according to the personal consumption expenditures index published by the Department of Commerce. In June, Federal Reserve officials significantly raised their projections for the economy.

Since December 2020, employers have generated a robust 200,000 new jobs or more every month. The identical level it was back in March 2022 when the Fed initially began increasing interest rates, unemployment is still at a nearly fifty-year low of 3.6 percent. As the Fed first initiated rate hikes, the U.S. Economy has continued to demonstrate greater resilience than anticipated by experts.

Wage growth has been overshadowed by inflation since May. Meanwhile, the strong job market is helping consumers continue to give buying power, thereby buoying consumer spending.

Three months prior, Federal Reserve officials projected a 4.5 percent estimate, anticipating that unemployment rates would not reach a higher peak this year, ultimately reaching 4.1 percent in June.

If the anticipated deceleration never materializes, the Federal Reserve may need to reassess its inflation projections — and consequently, its trajectory for increasing rates. Housing costs have been presumed to imminently commence declining, frequently regarded as the largest expense in a family’s financial plan and presently exerting the most influence on inflation. As per the Case-Shiller Home Price Index, residential property values expanded for the fourth consecutive month following a seven-month decline. Even the real estate market is starting to change direction.

Policymakers elevated the depiction of the economy’s performance from “modest” to “moderate” in their statement after the meeting.

Since March, officials and staffers at the Fed have been penciling in a year later for the recession forecasting, but they no longer are, according to a new revelation by Powell.

During meetings, policymakers at the Fed rely on their guide to help them analyze and deliver research on the economy. However, Powell reiterated that the Fed’s analysis was not solely based on estimates, but also took into consideration the possibility of a recession.

Powell stated in May, “I continue to believe that it is possible to think that this time is really different.” Referring to previous instances of tightening by the Federal Reserve during a recession, he mentioned that “it wasn’t supposed to be possible for job openings to decline as much as unemployment without going up. Well, that’s what we’ve seen.”

From this point onwards, prices may potentially increase further, indicating that there is a greater possibility of risks for both core and headline inflation being tilted towards the positive side, as mentioned by the majority of officials from the Federal Reserve. In the meantime, nearly all officials, with the exception of two, expressed a significant level of uncertainty regarding their inflation forecasts.

According to Kathy Bostjancic, the principal economist at Nationwide, “Due to the possibility of inflation being greater, they are inclined to make a mistake in favor of increased interest rates. They may or may not be accurate in their evaluation of that risk, but it reveals a significant amount about their willingness to express their views.”

Markets fear that defeating inflation means starting a recession

Investors have been preparing in vain for what exactly happens when the economy experiences a recession — a decline in wage growth and consumption, which are essential factors contributing to inflation.

From the beginning of July 2022 onwards, the 10-year Treasury yield has been trading lower than the 2-year rate, which has traditionally been considered a signal of an economic downturn on Wall Street.

During the stagflationary era of the 1970s and early 1980s, it was widely believed that the only way to recover from a downturn caused by inflation is through a cure for inflation, which has been a source of anxiety for many.

The Federal Reserve also has a poor history of accurately predicting and implementing higher interest rates.

McBride asserts, “The past does not support their cause.” And alludes to an economic downturn, “Not only is it a worry, but the probabilities are in its favor.” “Observe the previous three [tightening] phases: Two of them concluded in economic recessions, and the one that did not was a period of economic deceleration, during which they had to change direction and commence reducing interest rates.”

The so-called “neutral” interest rate, which refers to the point where economic growth no longer stimulates borrowing costs, may be coming up soon. Experts say that a drop in interest rates last year may have a full effect on the economy, resulting in slower job growth and fewer job openings. However, the Federal Reserve’s interest rate decisions often complicate the filtering of the economy.

It’s important to recognize that any escalation in interest rates could pose risks to the U.S. Economy, as demonstrated by the recent bank failures in March. Furthermore, such a rate hike could potentially have an even greater impact on the overall economy, with the potential to no longer stimulate economic growth.

The problem of judging and being forward-looking in the economy is becoming more difficult just because lags make it harder, according to Bill English, a finance professor at the Yale School of Management who spent 20 years at the Fed. Bill English, a finance professor at the Yale School of Management, says that if you conclude that you need to move faster, then you might be worried more about inflation and staying high, and less worried about the slowing economy, and if you’re balancing risks, you’re getting inflation built into the wage-setting and price process.

5 steps to take with your money when rates and recession risks are high

Unless the Fed reduces interest rates, the expenses associated with borrowing are also improbable to decrease. Every increment implies elevated borrowing expenses for individuals, encompassing credit card, personal loan, auto loan, and other types of borrowing. The majority of the Fed’s interest rate hikes might be concluded.

Take steps now to prepare your finances for this new era of monetary policy, as it is unlikely that borrowing costs will return to record-low levels anytime soon. The highest rates in more than two decades mean that money is no longer cheap.

1. Keep a long-term mindset

Remember, when times in the stock market become brutal, it is important to protect your long-term mindset and maintain a diversified portfolio. However, do not succumb to the volatility of the market. Keep in mind that higher interest rates from the Fed or the possibility of a recession could worsen the volatility and cause stocks to plummet, resulting in pain for investors. Additionally, it is important to consider the differing expectations about what the Fed might do with rates in the coming months, as this could further contribute to market volatility.

2. Pay down debt

Based on Bankrate data, the mean interest rate for credit cards has slightly decreased from its peak in the series, but it is still at unprecedented levels that no consumer had witnessed prior to the Federal Reserve’s recent efforts to combat inflation. Particularly for individuals with high-interest credit cards, their vulnerability increases if they possess a loan with a variable interest rate. However, consumers who have fixed-rate debt like a mortgage will not experience any effects resulting from an increase in the Federal Reserve’s interest rate.

In periods of economic hardship, numerous lenders do not provide as favorable conditions — or eliminate those opportunities entirely. Nevertheless, the present moment might be opportune to seize, as certain credit cards provide borrowers with a zero interest rate for a duration of 21 months. You might want to contemplate consolidating your debt by utilizing a balance-transfer card in order to make a more significant reduction in your outstanding balance.

According to McBride, if you don’t want to be in a situation where you have higher interest rates on your home equity line of credit or credit card, you might want to consider refinancing into a fixed-rate loan with a home equity line of credit (HELOC) or an adjustable-rate mortgage.

3. Boost your emergency savings

It is important to carefully evaluate your finances and find ways to convert your rainy-day fund into cash. Many online banks now offer yields that can beat inflation, especially in the midst of higher inflation rates. Consumers should consider building up a cash cushion in case of emergency expenses, as high inflation can erode its value.

4. Find the best place for your cash

By transitioning to a high-yield savings account, individuals can increase their earnings on their funds. Numerous accounts in the market are offering interest rates of approximately 5 percent to customers who have accounts with them. In contrast to a mere $25 earned from the average savings interest rate of 0.25 percent, depositing an initial amount of $10,000 into an account with a 5 percent annual percentage yield (APY) would result in a $500 interest gain.

Prior to decreasing their own returns, financial institutions frequently do not wait for the Federal Reserve to reduce interest rates. Individuals with a substantial amount of funds in an emergency savings account may also consider securing those increased returns for an extended period by initiating a 2-year or 5-year certificate of deposit.

5. Think about recession-proofing your finances

When it comes to staying focused on the long haul as an investor and identifying your risk tolerance, experts say it’s important to stay connected with your network and build up your emergency fund. Given that there are plenty of risks that lie ahead, it’s always advisable to be on the lookout for ways to recession-proof your finances and stay ahead of the curve with the help of the Federal Reserve.