The Fed Is Poised to Pause Interest Rate Hikes – What This Means for You

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Following nine rate increases since March 2022, the Federal Reserve seems close to pausing its hikes. Several economists believe the Fed will deliver a last 25 basis point rate increase at its next meeting on May 3 and then pause the hikes.

This would be a welcomed relief for Americans on several fronts. First, it would mean that the Fed is confident inflation is continuing to cool off — translating into lower prices for everything from rents to food and cars. In addition, lower rates also mean that borrowing could become cheaper than it currently is.

Speaking at a press conference following the Federal Open Market Committee (FOMC) meeting on March 22, Fed Chair Jerome Powell said that some officials had considered a pause in the days leading to the meeting.

One factor that hindered the decision was the recent collapses of both Silicon Valley Bank and Signature Bank, which threatened to trigger a “risk of contagion to other banks and financial markets more broadly.”

And nearly 90% of the economists who participated in a Reuters poll, expected a 25 basis point increase at the May 2-3 meeting.

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But now, as Barron’s reports, several economists believe that the Fed should stop tightening and that the consequences of not doing so could be severe.

For one, higher interest rates mean higher borrowing costs for consumers and businesses, so credit cards, loans and mortgages have been more expensive.

“While the Fed is expected to hike one last time in May, inflation is probably slowing enough for policymakers to pause after that. They might even cut later in the year if current trends continue,” said David Russell, Vice President of Market Intelligence at TradeStation.

The most important reason is the slowing economic picture, which we really saw in the services index of March PPI, he added, noting that wages have also refused to spike as workers re-enter the labor force.

“Second, a slowdown in rents is just now hitting CPI. That’s set to continue as more apartments come online. Third, car prices are easing — much to the chagrin of Tesla investors,” said Russell

Russell also pointed out that the actual makeup of the Fed could also be more dovish, as “noted hawks” such as James Bullard and Loretta Mester left the policy committee in December and new voters such as Austan Goolsbee are striking a more moderate tone this year.

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“All these points suggest we’ve seen the top in rates. Consumers can probably expect gradual relief on loans over the course of the year and into 2024. It could be especially positive for homebuyers,” he added.

Morningstar analysts echo the sentiment, saying they expect the Fed to pause its rate hikes by summer 2023, and then starting around the end of 2023, to begin cutting the federal funds rate.

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In turn, they expect that GDP growth will start accelerating in 2024.

“For investors, the Fed’s pivot should provide welcome relief. Rising interest rates played a key role in the selloff in both stocks and bonds in 2022. Bonds will certainly rally if yields fall in line with our forecasts for the next five years. And while not guaranteed, we expect that falling interest rates would likely also lift stock prices,” they said in an analysis.

As for inflation, they believe prices will continue to come down and come back “to normal levels,” including those of energy, autos, and other durables which will be a welcomed relief for Americans.

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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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