As was widely expected, the Federal Reserve said it will raise interest rates by three-quarters of a percentage point rate, in a back-to-back move, following last month’s historic raise. The new unanimous decision comes amid inflation at a 41-year high and fears of a looming recession.
The Federal Reserve Board’s Federal Open Market Committee (FOMC) said in a statement on July 27 that it decided to raise the target range for the federal funds rate to 2.25% to 2.50%, adding that it anticipates ongoing increases in the target range will be appropriate.
“Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” according to the statement. “Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.”
Chair Jerome Powell said in a press conference that given the inflation data, this was the “appropriate thing to do.”
“We are looking at compelling evidence that inflation is moving back down. We are data-dependent. Contrary to exceptions inflation, surprised to the upside, and projections for this year, has moved up. So we thought actions were warranted,” he said.
Jeffrey Rosenkranz, portfolio manager at Shelton Capital Management, told GOBankingRates that the unanimous decision to raise rates 75 basis points was well-telegraphed.
“The statement was little changed from the previous one, although there is a reiteration that the labor market is strong and job gains remain robust. This reminds us that the job of conquering inflation is not finished, even though they acknowledge that recent indicators of spending and production have slowed,” he said.
Rosenkranz added that while investors are eager for clues about the September meeting, there will be significant incoming data to interpret between now and then.
“The importance of these upcoming economic reports, coming right in the middle of the summer vacation season when trading liquidity is at its worst, will potentially exacerbate volatility around some of these releases. All in all, very much right down the middle of the fairway on this one, pending any further insights from the press conference,” he said.
Kevin Rendino, Chairman and CEO at 180 Degree Capital, echoed the sentiment, telling GOBankingRates that in his opinion, “they do a good job at telegraphing exactly what they are going to do so it’s no surprise. On the other hand, most of their moves are lagging to what has already happened.”
“They have been behind the curve and catching up to the reality of what they could have been doing a year ago. They are fighting a lagging data,” he added.
Earlier this month, the Fed released the minutes of its June 14-15 FOMC meeting, noting that “many participants raised the concern that longer-run inflation expectations could be beginning to drift up to levels inconsistent with the 2% objective. These participants noted that, if inflation expectations were to become unanchored, it would be more costly to bring inflation back down to the Committee’s objective.” Participants judged that an increase of 50 or 75 basis points would likely be appropriate at the next meeting, according to the minutes.
How Does the Rate Hike Affect You?
In terms of what this new hike means to consumers, Michele Raneri, vice president of U.S. research and consulting at TransUnion, told GOBankingRates that it will most likely impact them with mortgages and credit cards.
“Interest rates on new fixed-rate mortgages, which are a majority of mortgages, often increase after a Fed interest rate increase, which will make buying new homes or refinancing more expensive. Often when people buy a home, the amount they are willing to spend aligns with how much they can afford for a monthly payment. In order to buy the same house that one could have afforded just six months ago, consumers may select an adjustable-rate mortgage because their initial monthly payments will be less than a fixed rate mortgage,” she said.
As for credit cards, she said that with the average consumer credit card balance of about $5,200 – today’s interest rate hike for consumers who do not pay off their balances in full will raise minimum monthly payments by less than $4, or about $40 per year. Finally, she added that the higher interest rate environment also adds more pressure to consumer wallets, especially as fears of a recession rise.
She recommends that to alleviate some of that pressure, consumers can pay down outstanding debt balances as much as they can, particularly high-interest credit card debt.
“They also can look to consolidate credit card balances onto a single lower-interest card or a personal loan to lower monthly payments, enabling them to pay down balances faster. It also is beneficial to have an emergency fund of savings available for unforeseen expenses. Three to six months of expenses is a good rule of thumb, but even a much smaller amount – a few hundred dollars – can make a big difference if emergencies occur.”
What’s Next For Interest Rates?
Tim Holland, Chief Investment Officer, Orion Advisor Solutions, told GOBankingRates that what matters now is the path forward for inflation through August and up to the next Fed meeting in September.
“Many market observers – including us – are hopeful that inflation will continue to moderate, putting the Fed in a position to raise the Fed Funds Rate by 50bps at its September meeting,” he said. “While the Fed’s long-run target for inflation is 2% — and we don’t see how we will be anywhere near that level by the end of the year – we think there is a good chance the Fed will moderate the degree of interest rate increases into year-end, concerned about weakening economic conditions and aware that forward-looking inflation expectations have come in dramatically. If the Fed can ease off the break into year-end, that should be a meaningful positive for investor sentiment and risk assets.”
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