Fed Rate Hike Smallest Since March 2022: Inflation Eases but Remains Elevated

Powell announces a 0.25 percentage point interest rate increase, Washington, USA - 01 Feb 2023

As was expected, the Federal Reserve dialed back its hike, unanimously stating on Feb. 1 that it would raise interest rates by a quarter point for its first meeting of 2023. This is the eighth (and smallest) rate increase since March 2022.

While this slowing down is welcome, it doesn’t quite represent a dovish pivot yet, as Fed officials said in a statement that “inflation has eased somewhat but remains elevated.” This latest, smallest hike follows December’s 50bps hike and four consecutive 75 bps hikes.

“Today’s rate hike confirmed the market’s view that The Fed sees inflation easing, but we’re not out of the woods yet,” said Ben Vaske, investment research analyst at Orion Advisor Solutions. “Heightened attention now shifts to [Feb. 2’s] jobs report where we’ll hope to get further evidence that tightening is having its intended effect.”

The Federal Reserve Board’s Federal Open Market Committee (FOMC) said in the Feb. 1 statement that it decided to raise the target range for the federal funds rate to 4.5% to 4.75%. “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” it added.

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Michele Raneri, vice president of U.S. research and consulting at TransUnion, said that this second consecutive lower hike serves as evidence that the Federal Reserve is signaling significant progress made in tamping down inflation, and that we have reached a point where rate hikes can be further scaled back.

A notable point is that FOMC officials also said that “in determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments” — changing the phrasing from “pace of increases” to “extent of increases.”

“Parsing the language over the fact that ‘ongoing increases’ still has a plural ‘s’ at the end or debating the nuance of substituting ‘extent’ for ‘pace’ of future rate increases, is all well and good,” said Jeffrey Rosenkranz, portfolio manager at Shelton Capital Management. In reality, there is not yet enough clear evidence of a trend lower in inflation, he added, noting that the job market is still very tight, which feeds into persistent pressure in the services sector. 

“All of the cumulative tightening should start to bite into that labor market, and there are some hopeful early indicators such as the large drop in temp employment, hours worked, or hourly wages,” said Rosenkranz. “However, ultimately the Fed is going to overcorrect to make sure the job is done once and for all and worry about cleaning up the mess later. They are frustrated that financial conditions have eased massively, making their task more complicated.”

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There are two big implications of the change in wording, said Bill Adams, Chief Economist for Comerica Bank: “First, the Fed is confirming they are near the end of the hiking cycle. Second, the Fed is still guiding expectations toward a terminal rate of at least 5% to 5.25%, not the 4.75% to 5% range that markets have been contemplating as the peak in recent weeks.”

How will this new hike affect you?

While 25 bps was expected, the cumulative effect is what’s most important for consumers, according to senior industry analyst Ted Rossman at CreditCards.com. The Fed has now raised the federal funds rate 450 basis points since last March.

As a direct result, the average credit card rate went up more in 2022 than any other year on record. The current national average is 19.95% and it will soon cross 20% for the first time since we started tracking in 1985, said Rossman.

“Many individuals have seen their credit card rates go up even more than the national average. The way most credit cards are structured, if the Fed raises by 450 basis points, there’s a good chance your rate will be 450 basis points higher,” he said. “Let’s say you had $5,000 in credit card debt and made minimum payments at 16.3%. That would have kept you in debt for 185 months and accumulated a total interest expense of $5,517. But if the rate were 450 basis points higher (20.8%), now the total payoff time is 195 months and the total interest expense is $7,224.”

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Rossman added that this is why it’s so important to prioritize credit card debt payoff. “These rates are so much higher than most other financial products. My top tip is to sign up for a 0% balance transfer card, which allows you to pause the interest clock for up to 21 months,” he said.

In addition, despite the smaller hike, consumers will likely continue to feel the double-edged effects of both continued inflation and high interest rates for at least a while longer, said TransUnion’s Raneri.

“They may seek to shed high interest-debt via personal loans or other lower-interest loan products. Given their continued strong equity position, homeowners may continue to turn to HELOCs and HELOANs to help reduce higher interest debt and improve monthly cash flow, in contrast to the new and refinance mortgage market, both of which will likely see below average activity,” she added.

Explore: Why Prices Could Remain High Even as Inflation Declines
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Finally, some experts argued that the Fed will have more to say at the March meeting, which will include economic projections.

“The Fed punted with a nothing-burger statement. The March meeting is a lot more important because we’ll get another Dot Plot,” said David Russell, VP Market Intelligence at TradeStation Group. “Before then, we’ll get two CPI and payroll reports, plus Congressional testimony. We still have a lot of data before policymakers need to take a stand. Powell is keeping his options open. If he wants to pivot, there is plenty of time before March.”

He added that while the news continues to improve with wage inflation easing in the fourth quarter and oil is sliding, “we’re still in wait-and-see mode.”

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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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