Fed Raises Rates Another Quarter Point — Is This the Last Increase for 2023?

Mandatory Credit: Photo by CHINE NOUVELLE/SIPA/Shutterstock (13841472a)U.

Despite growing calls from politicians and economists for the Federal Reserve to pause its rate hikes, it came as no surprise that Fed officials once again unanimously stated on May 3, that they would raise interest rates by a quarter point. The question now is what the Federal Reserve’s Federal Open Meeting Committee (FOMC) intends to do in the coming months and whether this will be the last increase for 2023.

With this 10th rate increase since March 2022, the Fed was tasked with a delicate dance between taming inflation — which is still a far cry from its 2% goal — and the risk of pushing the economy into a recession while also stabilizing the banking sector.

Speaking at the press conference, Fed Chair Jerome Powell reiterated that he understood the hardships high inflation is bringing as it erodes purchasing power. 

Powell also addressed the tightening of credit conditions due to the banking turmoil, saying that it was “quite impossible to have an estimate.”

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He later said, “I would say there were three large banks that were at the heart of the stress,” adding that these issues have been resolved. 

“I also think we are very focused on what’s happening and we will continue to very carefully monitor what’s going on in the banking system.”

Asked whether Fed policy rates are now “sufficiently restrictive,” Powell said it’s an “ongoing” assessment. “Before we really declare that,” the Fed would need to see data accumulate. He added that the Fed has to balance the risk of not doing enough against the risk of slowing down the economy too much.

A particular focus the past few weeks and going forward is what’s happening with credit tightening and whether it is having an effect on lending and how it fits with monetary policy, he shared.

It’s not in the Fed’s forecast that inflation will move down quickly. “In that world, it would not be appropriate for us to cut rates,” he said.

That being said, when he was asked whether the Fed will pause its hikes in June, Powell said that a “decision on pause was not made today.” 

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“The Fed’s 10th hike of the current cycle comes amid ongoing banking sector distress and a now softening labor market,” said Ben Vaske, investment strategist at Orion Advisor Solutions. “While the market strongly anticipated this raise to 500-525, we suspect that the Fed will follow their own signaling from here and allow the economy a pause to digest the last 14 months of hiking.”

Fed officials said in a statement that the U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks,” Fed officials said in a statement.

Federal officials said the committee decided to raise the target range for the federal funds rate to 5 to 5-1/4% and will closely monitor incoming information and assess the implications for monetary policy, according to the statement.

“The Fed took another step back from its super-hawkish stance by saying they need to determine future policy,” said David Russell, vice president of market intelligence at TradeStation.They’re setting up a potential pivot by outlining a series of reasons to pause. Given developments in the banking sector and slowing inflation, there’s more chance this was the last hike. ” Russell added that while conditions have improved, the big question now is whether Powell is willing to see it.

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“He’s been good at fighting the last war. The big risk now is that policymakers will remain too tight when it’s no longer necessary,” added Russell.

In what might signal a future pause, Fed officials changed their phrasing to “in determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time,” from its previous phrasing of “anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.

Jeffrey Rosenkranz, portfolio manager at Shelton Capital Management noted the change, adding that however, that the FOMC did not tweak the language on the job market, even though there are early signs of improvement.

“The Fed acted as the market expected and will now wait and see how the cumulative impact of all of the tightening from both rate increases and financial conditions plays out. We believe the economy is slowing; if the Fed disagrees, they will over-tighten and ensure that it does,” added Rosenkranz.

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Finally, according to Mace McCain, president, managing director and CIO at Frost Investment Advisors, this latest hike was justified given the recent move up in PCE, inflation expectations and the employment cost index. 

“Their single minded focus on inflation comes at the expense of main street employment and small businesses. Tighter credit and higher borrowing costs will weigh heavily on economic growth, pushing us into a slowdown in late 2023 or early 2024,” added McCain.

What Does it Mean for Americans?

For Americans, this new hike means continued higher interest rates and higher borrowing costs — so credit cards, loans and mortgages will be even more expensive.

Michele Raneri, vice president and head of U.S. research and consulting at TransUnion said that the Fed’s move is an indicator that while inflation has slowed and the economy has cooled generally, it believes we have not quite reached the point where interest rate hikes can be halted entirely.

From a consumer credit perspective, Raneri said that the impact of further rate hikes will likely continue to be felt by borrowers across a range of industries.

“Some examples include consumers who are looking to buy a car, or perhaps those seeking to purchase a home, or refinance one they already own,” said Raneri.  “For as long as interest rates remain relatively high, consumers are advised to continue to be diligent in keeping their own individual credit profiles in the strongest financial positions they can be.”

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She added that this includes continuing to pay down as much high-interest debt as they are able to, ensuring they have the ability to pay for any new debt acquired, and continuing to maintain a consistent record of on-time bill paying overall.

And in terms of credit cards, rates will remain high for the foreseeable future, said Ted Rossman, senior industry analyst at Creditcards.com.

“The Fed’s party line seems to be “higher for longer,” although investors are pricing in rate cuts starting around September,” said Rossman.

Rossman added that the current national average is a record-high 20.23%, and “in that stratosphere, it honestly doesn’t even matter all that much if your rate is 19% or 20% or 21% — they’re all very high.”

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In turn, he said it’s very important to pay down credit card debt as soon as possible because these rates tend to be several multiples higher than most other forms of debt.

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“My best advice is to get a 0% balance transfer card to pause the interest clock for up to 21 months,” he said. “You could also look into a personal loan as a form of debt consolidation or a debt management plan offered by a reputable nonprofit credit counseling agency such as Money Management International. That last option is especially advantageous if you have a lower credit score, a lot of debt and/or if you just want some extra help navigating through the process.”

Finally, other experts note that consumers, which are facing the biggest bank failure since 2008, have not seen wages keep up with inflation and now see even higher interest rates.

“Combine that with layoffs at many large companies and the threat of recession looming on the horizon and you have an unfortunate confluence of events that leaves consumers with limited abilities to invest for the future and increasingly less in their wallet each month,” said Christopher Alexander, CCO, Liberty Blockchain.

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.
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