Fed Raises Benchmark Rate 25 Bps to 5%-5.25% target range

The recent announcement of the Fed to increase its benchmark interest rate for the 10th consecutive time is likely to result in a continued rise in the cost of borrowing. The federal funds rate, indirectly linked to the cost of loans, mortgages, auto financing, and credit cards, has been raised by 25 basis points, bringing it within a range of 5% to 5.25%.

The year-over-year inflation rate stands at 5%, which is still well above the Fed’s target of 2%. This implies that the Fed will continue to curb inflation, including raising interest rates. This move is unsurprising as Fed Chair Jerome Powell has repeatedly emphasized the need for continued rate hikes until inflation is controlled.

Higher interest rates imply that borrowing costs will increase, making it more difficult for businesses and individuals to access loans. For example, individuals planning to take out a mortgage will face higher interest rates, which could increase monthly payments. Similarly, the rise in interest rates will also affect businesses that rely on borrowing for investment purposes.

However, it’s important to note that the Fed’s decision to raise interest rates is correct. The central bank is responsible for maintaining price stability, which is crucial for a healthy economy. When inflation is high, it erodes the purchasing power of money and can lead to decreased economic growth. Therefore, the Fed’s move to raise interest rates is aimed at preventing this from happening.

Impact of rising interest rates on Borrowers and the Fed’s Projection for Future Rate Hikes

Since the Federal Reserve began increasing interest rates in March 2022, we have seen a significant rise in average interest rates across various types of loans. According to Federal Reserve data, the average interest rate for credit cards has climbed from just over 16% to nearly 21%. Similarly, data from Freddie Mac shows that the average rate for 30-year fixed-rate mortgages has increased from 3.76% to 6.43%.

Regarding auto financing for a new car, the average interest rates for five years have increased from 3.98% to 6.58% as of April 2023, as reported by Bankrate. Finally, Bankrate data also shows that the average interest rates for personal loans have climbed from 10.30% to 10.82%.

These rising interest rates have important implications for borrowers. For example, the higher interest rates for credit cards and personal loans could lead to increased monthly payments and overall borrowing costs. Similarly, the higher interest rates for mortgages could make it more difficult for individuals to afford homeownership or to refinance their existing mortgage. Overall, rising interest rates are likely to continue as long as the Federal Reserve remains committed to controlling inflation.

According to its projections, the Federal Reserve’s recent interest rate hike on Wednesday is likely to be its final one for 2023. However, Fed Chair Jerome Powell has indicated that further tightening might be necessary if inflation rates remain high.

Diverging Predictions for future interest rate changes from the Fed and Traders in Federal Funds Futures Contracts

On a positive note for borrowers, the Fed predicts it will cut interest rates in 2024, with its benchmark interest rate expected to decrease to about 4.3%. However, traders in federal funds futures contracts have a different outlook. They predict that the Fed will begin cutting rates well before next year. In fact, according to the CME’s FedWatch tool, there is a nearly 75% probability that the federal funds rate will be between 4% and 5% by September 2023, based on their predictions.

Overall, it remains to be seen how interest rates will evolve over the coming months. While the Fed has projected a decrease in rates in 2024, traders in federal funds futures contracts believe we could see rate cuts sooner. Ultimately, borrowers must stay informed and vigilant to make the best decisions for their financial well-being.

Chief financial analyst Greg McBride said, “The Fed has created their credibility crisis on inflation, with markets expecting the Fed to cave at the first sign of trouble economically and begin cutting rates.” “The Fed is saying the opposite, that they will see the job through in getting inflation under control. Ultimately, one of those will be proven right, and one will be wrong.”