Examining the Latest Interest Rate Increase From the Federal Reserve

How Much Longer Does the Fed See Interest Rate Increases Continuing

Yesterday, the Federal Reserve announced a 25 basis point increase in the Federal Funds rate, in a move that was expected and predicted by many economists. This increase now takes the Federal Funds rate up to 4.75%, with each basis point being .1 of a whole percentage point. This 25-point increase is a decrease from the previous 50-point increase in January, with that increase being 25 points smaller than the four previous increases of 75 basis points. These increases in the Federal Funds rate are being done in order to slow down inflation, which has been running rampant throughout the U.S. economy since early 2022.

What is the Federal Funds Rate and How Does It Influence Inflation

You might be wondering what the federal funds rate is, and how it impacts the inflation rate. In short, the federal funds rate is the rate used by banks to determine what interest they will charge each other for overnight loans between themselves. The federal funds rate is actually a guideline for these rates, as the banks set these on an individual basis, with the average rate between all of those banks being known as the effective federal funds rate. Because the federal reserve’s rate influences how much these banks will owe each other on their overnight lending, increasing the rate will end up costing them more money, which raises the price of loans for both the banks and subsequently, for consumers. This slows down the economy as people stop borrowing as much due to the higher interest rates for credit cards, auto loans, etc. that have been affected by the federal funds rate.

Why Has the Federal Reserve Slowed Down Their Interest Rate Increases

In order to combat inflation, the Federal Reserve began increasing their interest rate drastically in 2022, including four increases of 75 basis points throughout the year. These interest rate increases came during a time when inflation was at its highest since the 1980s, with inflation peaking at 9.1% in June. Recently, however, encouraging data has come in from the Consumer Price Index (CPI), which is measured by the Bureau of Labor Statistics, and the Personal Consumption Expenditures Price Index (PCE), which is measured by the Bureau of Economic Analysis. The CPI measures, “the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services”, with the PCE measuring, “the prices that people living in the United States, or those buying on their behalf, pay for goods and services”. Of these two, the Fed prefers to use the PCE as their preferred method of determining the effects of their interest rate increases.

Both of these methods of determining current levels of inflation have been showing favorable data in the last three months, with the CPI showing three straight months of a downtrend in consumer inflation from November to January. This data initially led to the Fed decreasing their rate hikes down to 50 basis points, and the market expects this data to have influenced the Fed’s decision to decrease hikes further, down to the 25 basis points announced yesterday.

What is the Federal Reserve's Outlook For the Rest of 2023?

During Wednesday’s meeting, Jerome Powell, Chair of the Federal Reserve, noted that “We can now say for the first time that the disinflationary process has started”. Powell also reiterated the stance of the Federal Open Market Committee (FOMC), the governing body that determines the federal funds rate, that the rate needs to continue to be increased. Powell commented that it is the opinion of the FOMC that they have not achieved a sufficiently restrictive policy yet to fully counter the historic rise in inflation. The next meeting of the Federal Reserve is set for March 21 - 22, where the Fed will actually update their forecasts after carefully looking at the incoming data, particularly data concerning the labor market, and the CPI and PCE reports. This meeting will be critical in determining where the Fed believes the federal funds rate will end up, as they have stated in the past they are targeting above a 5% rate, while money markets anticipate a rate peak around 4.9%, and actually factoring in a rate cut in late 2023 according to Bloomberg.

What Does This Mean For You?

If you are looking to buy or sell a home in the near future, you are probably paying pretty close attention to these interest rates, and more importantly, to mortgage rates. You can read my blog discussing in more detail how the federal funds rate actually impacts mortgage rates to learn more about how mortgage rates are indirectly impacted by Fed interest rate hikes. For now, however, mortgage rates are staying solid at just a little above 6%, down significantly from their peak of 7% late last year. Our current market is cooling significantly from the market we saw during and after the pandemic, so now is a great time to start looking at homes, building equity, and investing in your future. Contact me today to schedule a complimentary consultation by filling out the contact form below, or by calling me at (404) 576-8515!