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While the US has been anticipating a 12 rate hike from the Federal Reserve, it’s safe to say that won’t happen anytime soon – for now.
Both investors and consumers voted to keep the benchmark lending rate at the rate they voted on this month. However, this should not be taken as good news entirely, as officials are still battling inflation.
According to Jerome Powell, the chairman of the Fed, officials are still not sure if they have raised interest rates high enough to avoid inflation. That message came after the Federal Open Market Committee’s (FOMC) November decision was released. Currently, the Fed’s average lending benchmark now sits between 5.25% and 5.5% – a 22-year high.
It was only in September when the economic forecasts were last updated, and officials expected the Fed to make another interest rate increase before the end of the year. If adopted, the Fed’s average benchmark lending rate could bring rates to a new 22-year high between 5.5% and 5.75%.
If that happens, it could be the last rate. Only one official projected that rates will go higher than that in 2024.
What does it mean to have higher rates?
Having higher rates means only one thing – more expensive borrowing costs. The prices that consumers pay to borrow money will always depend on the movement of the Fed, regardless of how much it costs to finance the purchase on a credit card or car loan.
However, the uncertainty is not two-sided. Not only are officials not convinced they need to raise interest rates, but they are also not sure if interest rates are high enough to fight inflation.
According to Powell, officials have not yet decided if they will have future meetings on the matter. He also said that they themselves are wondering if they need to raise interest rates.
One reason the Fed has been raising borrowing costs and interest lately is because it’s trying to tone a fiery post-pandemic economy. Such contributed greatly to the greatest inflation in history.
Although the Fed has seen some progress in maintaining the balance in prices, it is still working hard not to fail. Rising gas prices have also contributed to an inflationary recovery for two months straight this summer. According to the Bureau of Labor Statistics, gas prices are now holding steady at a 3.7% annual growth rate since August.
Should interest rates be increased?
Experts argue that the risks of withdrawing stimulus prematurely, potentially reigniting inflation, outweigh the risks of being too cautious. The historical experience of the Fed in the 1970s emphasizes the importance of restoring price stability to avoid prolonged economic challenges.
Although the US economy is showing signs of slowing, especially in job growth, the current slowdown is not a cause for immediate concern, given the historically low unemployment rate despite large Fed interest rate hikes starting in March 2022.
The robust labor market is allowing workers to regain ground lost to inflation, although the restoration of full wages is expected. The Federal Reserve aims to gradually cool prices without adverse labor market effects, fueled by strong consumer spending, with September consumption rising 0.7%. That spending contributed to a 4.9% growth in the financial system in Q3 2023, the fastest since 2021, according to GDP figures.
Economists stress that the recent rate hike signal is meant to keep the Fed’s options open. Tuan Nguyen, economist at RSMunderlines the importance of upcoming meetings, indicating that the Fed will decide between pausing or continuing with a hike.
How the Fed Measures the Cost of Money
Fed officials are wary of unexpected risks, recalling bank failures in March. Rising long-term interest rates and the looming threat of a government shutdown make it difficult to track the impact of inflation.
The Fed’s approach to futures rates hinges on weighing conflicting factors. If experts worry less about an economic slowdown and more about persistently high inflation, a faster response could be warranted.
A Mixed Bag of Opinions From Investors and Analysts
While the Fed has expressed uncertainty about raising interest rates in the face of inflation, investors also have the same thoughts. In addition, investors are not sure that the Fed will be able to keep interest rates the same.
Although the Fed has not yet decided, data from CME Group’s Fedwatch tool shows that most market participants still think the Fed will raise rates this year. Some experts adding to the pool included Morgan Stanley (NYSE:MS) and Moody’s Analytics.
The Federal Reserve could extend its pause on the lagged impact of higher rates on the US economy, taking up to a year for rates to affect the labor market. Raising rates is like driving while looking in the rearview mirror, and the Fed could risk slowing the economy too much. Despite a strong third quarter, higher rates may present recession risk, as historically observed with Fed rates.
The likelihood of a recession is a concern, given historical patterns, as two of the last three stress cycles have resulted in recessions. The Fed’s ability to impact the economy without rates is limited, and if rates rise while inflation falls, it could lead to deflation and negatively affect the economy. So what do you think? Is the Fed rate hike over?
As of the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to InvestorPlace.com’s Publishing Guidelines.
Chris MacDonald’s love of investing has led him to pursue an MBA in Finance and take on a number of executive roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, combined with his zeal to find undervalued growth opportunities, contributes to his conservative, long-term investment outlook.
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