WASHINGTON – And then the Fed rested.
After its sharpest flurry of interest rate hikes in four decades, the Federal Reserve held its key rate steady Wednesday but signaled two more increases are likely this year as officials continue to battle high inflation.
That’s more projected hikes than financial markets and many economists anticipated.
The decision leaves the benchmark rate at a range of 5% to 5.25%. It marks the first meeting at which the central bank hasn’t raised its federal funds rate since January 2022.
Watch the Fed media live conference: https://www.federalreserve.gov/live-broadcast.htm
Fed policymakers estimate they’ll push up the key rate by another half percentage point to a range of 5.5% to 5.75% in 2023, according to their median forecast. Financial markets and many economists expected the Fed to forecast just one more quarter point hike in July. That still would have been higher than the peak rate Fed officials predicted in March.
By next year, however, the central bank expects to cut rates to 4.6% amid a weak economy and lower inflation.
“Holding the target range steady at this meeting allows the (Fed) to assess additional information and its implications for monetary policy,” the Fed said in a statement after a two-day meeting.
The central bank added that it will determine “the extent of additional policy firming that may be appropriate” to lower inflation to the Fed’s 2% target based on the lags with which its rate hikes affect the economy, inflation and economic and financial developments. Inflation is running at 4.4%, according to the Fed’s preferred measure.
The Fed’s decision to stand pat is set to provide a reprieve to consumers who have been socked with steady increases in rates for credit cards, adjustable-rate mortgages and other loans. Yet Americans, especially seniors, have benefited from the hikes by finally reaping higher bank savings yields after years of meager returns.
Two more quarter point bumps are possible because officials expect faster growth and more persistent inflation than they previously forecast, potentially providing more reason to nudge rates higher.
Officials expect their preferred measure of annual inflation to decline from 4.4% in April to 3.2% by year-end, below the March estimate of 3.3%, according to their’ median forecast. But a core measure that strips out volatile food and energy items and that the Fed follows more closely is expected to close out the year at 3.9%, above from the prior 3.6% estimate.
The economy is expected to grow a modest 1% in 2023, more rapidly than the previous 0.4% projection, and 1.1% next year.
And the 3.7% unemployment rate is forecast to rise to 4.1% by the end of the year, below the 4.5% previously forecast.
After lifting rates at 10 straight meetings since March 2022 – by a total 5 percentage points -- Fed officials have been split over whether to pause Wednesday or continue to push rates higher.
Last month, Fed Chair Jerome Powell suggested there was a good chance they would take a break to assess the delayed effects of a hiking campaign that most forecasters believe will cause a mild recession this year.
Powell also said deposit runs that sparked the collapse of three regional banks have toughened lending standards and could further ding growth, leaving the Fed less work to do.
But he said the Fed’s actions would depend on how the economy evolves.
A report Tuesday revealed that another inflation measure – the consumer price index—showed a significant slowdown in May to 4% annually from 4.9% in April and a 40-year high of 9.1% last June. But a core measure that strips out volatile food and energy items advanced sharply from April, keeping the yearly rise elevated at 5.3%.
Also, employers added a booming 339,000 jobs in May. Annual wage growth ticked down from 4.4% to 4.3% but that’s still historically high and could continue to fuel inflation as employers pass higher labor costs to consumers.
Consumer spending, which makes up 70% of economic activity, also has been robust as households rely on pandemic era savings to offset high borrowing costs and inflation.
The persistence of inflation has led some Fed policymakers to call Wednesday’s decision to stand pat a “skip” rather than a “pause,” noting a July increase was a good bet.
Others have noted the biggest impacts from the Fed’s rate increases so far have yet to be felt. They also expect inflation to fall substantially closer to the Fed’s 2% goal by the end of the year as rent increases slow. They believe the Fed should stand down to avoid a recession.
No. During the pandemic, households accumulated about $2.5 trillion in excess savings from hunkering down at home and trillions of dollars in federal stimulus checks aimed at keeping workers afloat through layoffs and business closures.
As a result, Americans have a big cushion of savings to help them weather high inflation and interest rates. They’ve whittled down much of that extra cash but about $1.5 trillion still remains, according to Moody’s Analytics.
Consumers also still have lots of pent-up demand to travel, go to ballgames and dine out now that the health crisis has waned. So while consumption has weakened, rising just 1% annualized at the end of last year, it bounced back and grew 3.8% in the first three months of the year.
Also, both households and businesses have historically low amounts of debt, Moody’s says, and so they’re not weighed down by high monthly debt service payments.
How will CD rates be affected by the Fed?
CD yields have soared in the past year as the Fed boosted interest rates, and more rate hikes would probably continue to make CDs more lucrative, particularly on short-term deposits.
But if the Fed pauses rate increases as many economists expect, banks will likely do the same and limit CD rate hikes.
On the other hand, if the economy - which has proven resilient - avoids a recession, CD rates may start to inch up, especially those with longer-term rates.
Housing interest rates today
The 30-year fixed mortgage rate on Wednesday is 7.13% while a 15-year fixed-rate mortgage is 6.30%. For 30-year jumbo mortgages, rates are 6.83%.
Mortgage rates for a 30-year fixed-rate loans have dropped from 7.24% last week, according to data from Curinos. Those rates sat at 7.01% last month. The 30-year fixed-rate average on Wednesday is 1.12 percentage points below the 52-week peak of 8.25% and 1.25 percentage points higher than the 52-week trough of 5.88%.
In the bond market, yields on the 10-year Treasury were up 3.79% prior to the Fed announcing its interest rate decision. Treasury bonds help set rates for mortgages and other important loans.
Maybe.
“At the beginning of this year, landlords were beginning to drop rents. And that means that leases that are coming online now in June, for example, would reflect those lower rents,’’ says Bright MLS Economist Lisa Sturtevant. “If rents indeed are coming down in a systematic way, we should see that reflected in the CPI as we head through the summer.”
But there’s also the possibility that rents may not drop by much.“ As the economy has been changing and landlords have been sort of reevaluating, we may see them keeping rents firmer than we thought they would, because of this increased demand for rental units,” she says.
Once again, housing costs were the biggest contributors to inflation, according to data from the CPI. Overall shelter costs were 8% higher than a year ago and rent inflation was 8.7% according to the report.
But private-sector indexes like Redfin, Zillow and Redfin say rent prices are weakening. So what’s the disconnect?
Rents slipped 1% nationwide in May as compared to a year earlier −the steepest drop since 2020−as a building boom boosted supply and anxiousness about the economy cooled demand, according to Redfin.
But the bureau measures changes in the cost of housing for both renters and homeowners as well as lodging away from home and tenants’ and household insurance. The cost to rent a primary residence is weighted the most.
If a housing unit’s owners live there, the bureau computes what it would cost the owner to rent a similar place, known as Owners’ Equivalent Rent (OER). The CPI program collects rent data from each rental unit every six months since rents are locked in place for a given lease term. It also allows for a larger sample, according to the Bureau of Labor Services (BLS).
However, in a fast moving, volatile housing market, that gauge can seem outdated compared to private indexes that look at current leases.
Most top economists say no. Housing sales are flagging and home prices are beginning to dip because of steep mortgage rates. Manufacturing activity has also contracted seven months in row, partly because high interest rates have crimped business capital spending.
But consumer spending, which makes up roughly 70% of GDP, has been surprisingly robust, rising 0.5% in April after adjusting for inflation. And the most important economic indicator, employment, also remains strong, with the public and private sector adding an average of 283,000 positions each month from March through May. Businesses are also keeping their staffs intact instead of laying them off, despite dwindling sales.
Taking all those factors into account, the bottom line is the economy is slowing down, but it’s not shrinking. GDP grew at a 1.3% annual rate in the first quarter, and it’s forecast to grow 1% in the current quarter, according to S&P Global Market Intelligence.
Dot plots are the way the Fed indicates its benchmark federal funds interest rate outlook at some Federal Open Market Committee (FOMC) meetings. FOMC members put dots on a chart pinpointing their projections for interest rates in upcoming years.
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) was down slightly by 0.27%.
At the Fed’s last meeting in May, the Central Bank increased interest rates to a range of 5% to 5.25%, it’s tenth hike in a row.
The constant stream of increases is in sharp contrast to the height of the COVID-19 pandemic when rates hovered near zero as the economy ground to a virtual halt. In March 2022, the rate was bumped up to a quarter percentage point. In May, it increased by 0.50 percentage point, followed by four hikes in a row of 0.75% percentage point each.
The last hike of 2022 was half a percentage point.
The Inflation rate has dropped by more than half from its peak of 9.1% in June, 2022. Here's a look at the inflation rate in the U.S. by month since May 2022:
- May 2022: 8.6%
- June 2022: 9.1%
- July 2022: 8.5%
- Aug 2022: 8.3%
- Sept 2022: 8.2%
- Oct 2022: 7.7%
- Nov 2022: 7.1%
- Dec 2022: 6.5%
- Jan 2023: 6.4%
- Feb 2023: 6.0%
- Mar 2023: 5.0&
- Apr 2023: 4.9%
- May 2023: 4.0%
The Federal Reserve is focused on two key elements of the economy: price stability and maximum employment. And those are the primary drivers of its interest-rate decisions. While its inflation target is roughly 2%, the Fed also takes the CPI into account to decide if prices are “stable.’’
The Consumer Price Index (CPI) is a gauge of the average change in prices for certain products and services during a period of time according to the Bureau of Labor Services.
While mortgage rates doubled following the first few rate hikes last year, the most recent increases have had very little impact.
“Each 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 had intended to do,” says Bright MLS Economist Lisa Sturtevant.
Still, anything that introduces uncertainty into the economy can cause mortgage rates to fluctuate.
Mortgage rates have been trending roughly the same across the board. Here were the average mortgage rates on June 13:
- 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, lower than last week's 7.24%, according to data from Curinos, but an uptick from last month’s 6.88%. Last year around the same time, 30-year fixed rates were 5.02%, which makes Tuesday’s rate significantly higher than it was 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.
In May, the Fed hiked the key rate to a range of 5% to 5.25%, the highest in 17 years. Since the central bank raised the rate from close to zero in March 2022, hikes have been constant, with the Fed boosting the rate nine more times to ease inflation which reached a four-decade high last June in the midst of the COVID-19 pandemic.
It’s doubtful that the Fed will cut rates, according to a Vanguard forecast based on a machine learning model. Though markets predict the Fed will clip its rate by more than half a percentage point by the end of 2023 based on bonds and futures contracts prices, Vanguard senior economist Asawari Sathe says that probably will not occur.
“We believe inflation will continue to moderate but remain above 3% through year-end, and unemployment will trend higher to a still reasonable 4.5%,” she said in an investors note. “In that scenario, the Fed cutting its policy rate this year is unlikely.”
Vanguard’s model expects the Fed “won’t be in a position to cut rates until the middle of 2024,’’ according to the note.
Consumer prices increased 4% in May, down from 4.9% the previous month, and a four-decade high of 9.1% last June, according to the CPI. That’s the smallest yearly rise since March 2021, and on a monthly basis, prices increased 0.1% following a 0.4% uptick in April.
Though price hikes overall have slowed, the Fed is more anxious about core inflation which stubbornly remains elevated.
While many expect a divided Fed to take a break Wednesday from its stream of rate hikes, economists are struggling to reach consensus on how it will move going forward as the economy remains resilient despite continuing inflation.
Before the release of a key inflation report Tuesday, some thought the central bank might roll out a quarter-point hike if the acceleration of prices was stronger than expected. Others said they believed rate hikes were done for the year.
Barclays predicted the Fed might increase rates again if more than 200,000 jobs were added to the economy last month, and core inflation rose by at least roughly 0.3%.
Employers blew past that hiring threshold, adding a stunning 339,000 jobs in May. And core prices, which don’t count volatile food and energy items and so better reflect longer-term trends, rose 0.4% for the third-straight month, according to the Labor Department’s consumer price index (CPI).
The jobless rate, however, which is calculated from a separate survey of households, bumped up from a five-decade low of 3.4% to 3.7%, according to the Labor Department, the highest it’s been since October. And the annual increase of core prices slipped from 5.5% to 5.3%, the lowest since November 2021.
If no rate hike, then what?: There may not be a Fed rate hike in June. But, Americans are still paying for the last 10
Overall, inflation slowed for an 11th straight month in May as grocery-price increases eased again and gas more than reversed the previous month’s rise. Consumer prices rose 4% , down from 4.9% in April and a four-decade high of 9.1% last June, according to the CPI. That’s the smallest yearly uptick since March 2021, and on a monthly basis, prices rose 0.1% following a 0.4% bump in April.
Fed pauses interest rate hikes, signals two more increases likely in 2023 to fight inflation - USA TODAY
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