With the latest Consumer Price Index (CPI) showing inflation up 0.4% in September, opinions as to what the Federal Reserve might do at its next Federal Open Market Committee (FOMC) meeting on Oct.31-Nov.1 are split.
While inflation is still a far cry from the Fed’s 2% goal, it decreased enormously from where it stood a year ago- at 8.2%, according to the Bureau of Labor Statistics (BLS) data.
At its last FOMC meeting on Sept. 19-20, the Fed paused its interest rate hikes for the second time this year, following 11 increases since March 22.
Yet, at the time, Chair Jerome Powell said that the pause did not mean they had reached the monetary policy that they were seeking.
“We want to see convincing evidence that we have reached the appropriate level,” he said at the post-meeting conference.
And the minutes from the meeting, released Oct. 11, indeed showed that “a majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted.”
Bill Adams, chief economist for Comerica Bank, said that the forward guidance released at the Nov. 1 decision will likely continue to signal that most members see the near-term decision as between a hike and holding rates steady.
“Following the minutes’ release, Comerica’s forecast will change to anticipate the Fed holding rates steady at the Nov. 1 decision, then making a final 0.25 percentage point rate hike of the cycle at the December 13 decision,” said Adams. “This is in recognition of the upside risks to inflation from the Israel-Hamas war, the Russia-Ukraine war, and the UAW strike, which could reduce auto inventories and push vehicle prices back up if sustained.”
Yet, he added that either way, the Fed is likely to pivot to interest rate cuts in mid-2024 as core inflation, wage growth, housing prices and other broad measures of price pressures move closer to pre-pandemic levels.
Other experts, such as Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance, believe it’s a “coin flip as to whether or not the Fed raises rates on Nov. 1 for a number of reasons, including both the jobs number and the inflation data this week both higher than expected, but also because the Fed is also worried about tightening too much.
What Does This Mean for Consumers?
The numerous rate hikes have hit Americans on many fronts as it means more expensive borrowing. So, credit cards, mortgages and loans have all been pricier.
If rate hikes were to stop, it could ease pressure on the housing market, for example. Homebuyers have been left on the sidelines for many months due to a combination of inflation, low inventory and exploding rates.
There is still no sigh of relief for homebuyers. Mortgage rates are continuing to soar and home prices have reached record prices. This, coupled with low inventory might still leave many buyers on the sidelines.
Indeed, as of Oct. 12, the 30-year fixed-rate mortgage (FRM) averaged 7.57% — the highest level in 23 years, according to Freddie Mac. This was the fifth consecutive weekly increase, as ongoing market and geopolitical uncertainty continues to increase. In turn, the housing market remains fraught with significant affordability constraints and as a result, purchase demand remains at a three-decade low.
“Today’s would-be buyers and homeowners continue to face challenges participating in the market due to both elevated mortgage rates and still-high home prices,” said Danielle Hale, Realtor.com chief economist.
Hale noted that mortgage rates rose past 6% in September 2022, and have remained above that threshold since, marking the first stint of 6-plus percent mortgage rates since the early 2000s.
To put this latest figure in context, a year ago at this time (week ending Oct. 12, 2022), the 30-year FRM averaged 6.92%. And for the same time of the year in 2021, it averaged 3.05% and 2.81% in 2020, according to Freddie Mac data.
If the interest rate hikes are over, that would be a huge relief for consumers, as credit rates are at their highest level in nearly two decades. As of Oct. 11, the average credit card interest rate was 21.10%, according to Creditcards.com.
“With just three weeks to go until Federal Reserve officials announce their next interest rate decision, most lenders are opting to leave record-high APRs on brand-new cards in place,” accordingto CreditCards.com’s latest Weekly RateReport. “But with card APRs stalled at unprecedented highs, a growing number of borrowers are voicing concern about their payments.”
Not Quite There Yet
Yet, as Thomas Hogan, economist, American Institute for Economic Research noted, financial markets show that investors believe the Fed is almost certain to raise interest rates in November or December and according to him, the Fed is also likely to keep rates high through the middle of next year rather than cutting in early 2024 as was previously expected.
“Americans are being squeezed by the combination of high prices and high interest rates,” he said. “They are paying higher interest on everyday purchases with credit cards and on larger purchases through home and auto loans.”
To make matters more burdensome for many consumers, most Americans have depleted any savings they earned during the pandemic recovery or held from the government’s pandemic spending programs, he added.
“Americans need to borrow more, but they can’t afford to,” he said.
One Glimmer of Silver Lining
According to Hogan, the flip side is that for those who can afford to save, now is a good time.
“For decades, low interest rates have made it hard for retirees or anyone who wanted to put their money in safe, long-term investments like bonds,” he said. “Now, interest rates on U.S. Treasury bonds are at the highest in more than a decade, giving savers a safe, stable place to store their money.”
In addition, Michael Micheletti, chief communications officer at Unlock Technologies, noted that for consumers who may have benefitted from these rising rates in seeking out higher interest rates for their deposits, those rates may be plateauing.
“The message there is that if you have cash on hand and are looking to secure a higher savings rate – such as with a CD – know that those rates probably won’t be going any higher, at least for now,” he said.
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