Sep. 20, 2023 at 12:16 pm

Will there be another interest rate hike?

September 20, 2023no commentNo tags

The Federal Reserve is expected to hold its key interest rate steady at its meeting on Wednesday, as parts of the economy, from jobs to housing, continue to weaken.

It would be only the second time in eighteen months the central bank declined to raise interest rates, interrupting a flurry of hikes that pushed the federal funds rate to between 5.25% and 5.5%, the highest level in 22 years, making it harder for consumers and businesses to afford a loan or pay off a credit card.

“We expect the Fed to leave rates unchanged at its September meeting,’’ Michael Pearce, Lead U.S. economist for Oxford Economics, said in an investors note. “Renewed signs of weakness in rate-sensitive parts of the economy and cooling labor market conditions should keep officials on the sidelines over the rest of the year.’’

Still, the Fed itself has kept the door open for at least one more hike before the end of the year.

Fed interest rate decision today

The Fed will announce its interest rate decision at 2:00 p.m. ET on Wednesday, September 20.

Protect your assets: Best high-yield savings accounts of 2023

Does raising interest rates hurt the economy?

In the long run it does, according to at least two economics and finance professors who presented a paper on the issue at the Fed’s annual conference in Jackson Hole, Wyoming last month.

The Fed’s aim when it boosts interest rates is to make it more expensive for consumers and businesses to borrow, cooling the economy and ultimately curbing inflation. But such moves can also stifle broader economic output and the potential for growth over the long term, the paper said.

“Our findings suggest that monetary policy may affect the productive capacity of the economy in the longer term,” wrote Yueran Ma and Kaspar Zimmermann, economics and finance professors at the University of Chicago. “A slower pace of innovation may then have lasting effects.”

When will inflation go down?

Inflation has come down significantly since it reached a four-decade high of 9.1% in June 2022. But the rate of price hikes has remained stubbornly above the Fed’s 2% goal. That’s partly because while the prices of some products have dipped, and the supply chain snags that emerged during the pandemic have mostly cleared, fixing a car, leisure activities and other services have become more expensive, largely due to rising wages.

What causes inflation?

Many different factors can lead to inflation. Most typically, it results from a “a macroeconomic excess of spending over the economy’s relative ability to produce goods and services,” said Josh Bivens, the director of research at the Economic Policy Institute, a left-leaning think tank based in Washington D.C.

That means more people are spending money on products or services that are in short supply given the demand, leading producers to boost prices.

“If everyone in the economy, tomorrow, decided they weren’t going to save any money from their paychecks, and they’re just going to spend every last dollar out of the blue, they would all run to the stores and try to buy things,” Bivens said. “But, producers haven’t produced enough to accommodate that big surge of across-the-board spending. So, you would see prices bid up.”

Too few producers can also spur a bout of inflation. A shortage of workers to deliver the desired products and services can also spark a hike in prices, Bivens said.

Finally, there’s also a level of “built-in inflation” within economies, with central banks like the Fed wanting inflation to stay at a certain level. In the U.S., that goal is 2%, meaning businesses can boost prices by 2% annually, and that shouldn’t be a hardship for consumers. That’s also the typical range for cost of living boosts by employers.

CD interest rate calculator

While higher interest rates hurt borrowers, the opposite is true for savers who can actually earn a little more for their money.

The interest paid out on everything from savings accounts to CDs to Treasuries has risen as the Fed has raised rates. When it comes to CDs, here’s the interest rate rundown from banking expert Ken Tumin at DepositAccounts.com.

Some 7-month and 13-month CD Specials pay 4.75% to 5.00% APY, respectively. However, remember: “These can be a good deal for savers, but savers have to make sure to close the CD Special at maturity.” Tumin said. “Typically, CD Specials will auto-renew into a low-rate standard CD. If the customer misses the grace period at maturity, their funds will be locked into a low-rate standard CD,” which can be much less lucrative.
Online longer-term CDs may not be as worthwhile, with the average online 5-year CD yield having fallen this year to 3.95% on September 1 from 4.04% on January 1.

Traditional savings account typical interest

The typical interest on a traditional brick-and-mortar savings account is roughly 0.45%. That’s the lowest return among fixed-income assets.

Is the Federal Reserve part of the government?

Yes. The Federal Reserve System is the central bank of the United States.

Oil prices today

The cost of crude oil was down 0.86% Wednesday, hours before the Fed announced its interest rate decision, to $90.42.

Still, generally higher oil prices are pumping up the price of gas according to AAA, and in turn, gas was the primary driver of August’s higher inflation rate. Gas prices increased 10.6% last month though they were 3.3% lower than a year earlier and far below the $5 peak also reached in 2022.

Filling up your tank isn’t likely to get cheaper any time soon as the global economic forecast becomes more upbeat and OPEC continues to decrease oil production.

Fed rate hike history

Since March 2022, the Fed has increased its benchmark federal funds rate 11 times, to a range of 5.25% to 5.5%. It boosted the key rate at 10 meetings in a row – the steepest streak of rate hikes in four decades. It paused those increases in June but resumed in July with another quarter-point hike.

Inflation rate

Overall, consumer prices increased 3.7% annually in August, the second straight monthly rise after annual inflation was on the decline 12 months in a row.

A spike in gas prices was the main reason for the broader boost. Meanwhile, rising rents and increased costs to travel and to access other services were tempered by the shrinking prices of used cars, furniture and other products.

FOMC meeting today Live

Watch the Fed meeting live here.

Mortgage rates: Will they be affected by Fed’s rate decision?

The Fed doesn’t directly set mortgage rates. But they have pumped up the yield on the 10-year treasury bond, a guide for setting interest on an average 30-year loan, and that is helping fuel higher mortgage rates, according to experts.

Recently, mortgage rates have been through the roof. During the last week of August, mortgage rates were 7.2%, the highest they’ve been in 21 years, according to Freddie Mac. The interest rate on a 30-year fixed-rate mortgage hasn’t topped 7% since November, 2022.

Dow Jones

Futures contracts pegged to major stock indexes rose early Wednesday ahead of the Fed rate decision. Dow Jones industrial average futures edged up 0.37% while futures tied to the S&P 500, the broadest stock market index used in many mutual funds, gained 0.20%. Nasdaq futures were down slightly however by 0.01%.

Fed dot plot

If you look at the Fed’s Summary of Economic Projections report, you’ll find the Fed’s dot plot. The dot plot is a visual representation of where individual Fed officials predict interest rates will be for years down the line. The dot plot was first created in late 2011 and was intended to add additional transparency to the Fed’s decisions about monetary policy. In the latest dot plot, the majority of Fed officials indicated a target Fed funds rate between 4% to 4.75% would be appropriate for 2023. By 2024, they see rates going down to a range between 3% to 4%.

Will Fed raise rates in September 2023?

There’s no change expected to the current key rate of 5.25% to 5.5%.

What does the Federal Reserve do?

The Federal Reserve is the hub of the nation’s banking system, working behind the scenes to make sure the economy is functioning and stable, and that there is a balance between the nation’s financial vitality and consumer interests. Its goal is “maximum employment, stable prices, and moderate long-term interest rates,’’ according to its website.

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