The latest CPI report showed that falling energy prices pushed annual inflation down to 5% in March. Inflation is cooling faster than analysts had expected, but even today’s comparatively low 5% is two-and-a-half times higher than the Fed’s longstanding target of 2%. And interest rate hikes are still its primary weapon in the war on rising prices.
The central bank showed its commitment to the strategy when it announced its ninth consecutive rate hike in March despite several high-profile bank failures that occurred, in part, because of rising interest rates. The Fed’s ultimate goal is the delicate economic balancing act known as a soft landing — raising rates just enough to cool inflation but not enough to trigger a recession.
It’s worked so far, but will the Fed tap the breaks this summer or risk overplaying its hand by making money even more expensive to borrow?
Economists Predict One Final Hike, Then a Long Pause
Although no one knows for sure what the Fed will do in the runup to summer, there’s widespread agreement among the people who know best.
Reuters polled 105 economists about their expectations in the coming months. Ninety-four of them — nearly 90% — predict the central bank will hike rates again in May by 0.25%, the same as the most recent increase in March.
The panel also predicted that May would be the Fed’s final rate increase for 2023 and that a “short and shallow” recession would follow later in the year.
Or, Rates Could Keep Rising Through the Summer
Last year, inflation peaked in the summer when gas hit $5 a gallon. Consumer spending — and therefore demand — rises in the summer because it’s the busiest travel season, it has three major holidays and, of course, school is out.
“The Fed is trying to slow inflation,” said Paul Walker, author of “A Money Book Anyone Can Read.” “And as millions of students start spending and earning money over the summer, inflation will surge.”
Despite the consensus of economists, it makes sense that the Fed would be reluctant to let up just as a surge in seasonal spending threatens to make prices rise again.
“Interest rates will continue to go up this summer,” said Walker.
The Fed Also Might Take a Wait-and-See Approach
The third scenario is that the Fed does nothing at all until the impact of its most recent rate hike plays out.
“While the Federal Reserve claims that they foresee one additional hike in interest rates in the near term, it is my belief that rates will plateau during the second and third quarters of 2023 as our nation trends towards a recession,” said real estate investor Mathew Pezon, CEO of Pezon Properties. “With the banking crisis and potential instability on the horizon, I believe the Federal Reserve will be hard-pressed to continue to raise rates.”
Don’t Hold Your Breath For Rates To Fall This Year
The consensus of the Reuters panel of economists is that rates won’t start to fall until the second half of next year — and the experts GOBankingRates interviewed mostly concur.
“I predict interest rates will not decrease until mid-2024,” said Baruch Silvermann, banking expert and CEO of The Smart Investor. “Although there has been a decrease, inflation remains high and is unlikely to fall below 4%. Therefore, I expect interest rates to remain stable. In the event of a recession, which may take three to six months to manifest, the FED may consider lowering rates in the second half of 2024.”
Either Way, There Will Be Winners and Losers
Many people are hoping the Fed will change course and offer some relief with lower rates — but for others, relief didn’t arrive until interest started rising. Either way, someone has to lose.
“A rise in interest rates will have both positive and negative consequences for different stakeholders,” said Dennis Shirshikov, head of growth for real estate investment firm Awning.com. “On the positive side, higher interest rates can be beneficial for savers, as they will earn more on their deposits. Financial institutions, such as banks and credit unions, may also benefit from increased interest income.”
The losers, of course, are borrowers.
“This could impact homebuyers and businesses seeking financing for expansion, potentially slowing economic growth,” said Shirshikov. “Additionally, higher interest rates may negatively affect the stock market, as investors could shift their focus toward fixed-income investments that provide more attractive yields.”
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