Keeping rates higher for longer: Fed moves carefully as it battles to stamp out inflation

WASHINGTON – The Federal Reserve held its key interest rate steady Wednesday but signaled another hike is likely this year amid still elevated inflation and a sturdy economy.

The central bank also forecast fewer rate cuts next year than previously expected as it keeps rates higher for longer to stamp out inflation.

The latest decision leaves the benchmark short-term rate at a 22-year high of 5.25% to 5.5%. It marks just the second meeting at which the Fed hasn’t raised its federal funds rate since it began its hiking campaign in March 2022.

How high will interest rates really go?

Fed policymakers estimate they’ll nudge up the federal funds rate by another quarter percentage point this year to a range of 5.5% to 5.75% in 2023, similar to their median forecast in June. Financial markets and many economists don’t buy it. They expect the Fed to stand pat the rest of the year because of signs the job market and inflation are cooling.

Protect your assets: Best high-yield savings accounts of 2023

What did Powell say today?

At a news conference, Fed Chair Jerome Powell stressed the Fed has made no decision about whether to lift rates again and is in no rush to do so.

"Given how far we've come, we are in a position to proceed carefully," he said.

Powell said he's pleased with how much inflation has come down but officials want to see a more sustained decline before concluding they can keep rates steady.

"We want to see convincing evidence that we've reached the appropriate level" of interest rates, he said. Noting that inflation has fallen encouragingly since May, he added, "We want to see that for more than just three months."

By next year, Fed officials predict they’ll cut the rate to 5% to 5.25%, higher than the 4.5% to 4.75% they projected in June as they expect the economy to remain resilient and inflation to drift down just gradually. That means officials likely will start trimming rates later in 2024 than they had predicted.

"Economic activity has been stronger than we expected," Powell said in explaining why officials are forecasting fewer rate cuts next year. That, he said, "means we have to do more with rates."

He clarified, though, that a robust economy itself wouldn't lead the Fed to raise rates further unless officials believe the stronger growth would spark another inflation spike.

In a statement after a two-day meeting, the Fed repeated that “in determining the extent of additional (rate increases) that may be appropriate” to lower inflation to the Fed’s 2% goal, it will assess the lags with which its rate hikes affect the economy, inflation and economic and financial developments.

Morgan Stanley had predicted the Fed would remove the word “additional,” hinting it’s less likely to bump up rates again this year.

The Fed also upgraded its view of the economy, saying it has been expanding at a “solid” pace compared to its prior description of a “moderate” pace. It noted that “job gains have slowed in recent months but remain strong.”

Officials are struggling to take the measure of an economy and job market that are downshifting but holding up remarkably well despite rising prices and interest rates. Inflation, meanwhile, is slowing though not as rapidly as policymakers would prefer.

Goldman Sachs says those developments should herald an ideal scenario in which the Fed can halt its rate hikes – helping avoid a recession ‒ as moderating rent increases in coming months cause inflation to pull back more swiftly.

But Barclays believes another rate increase is likely because officials want to see more decisive evidence that inflation is moving closer to 2% and worry that COVID-related labor shortages and a healthy labor market could continue to spur strong wage growth that feeds into prices.

By 2024, contrary to the Fed's forecasts, several top economists reckon officials will be more worried about a flagging economy than stubbornly high inflation.

"We expect the real economy to be considerably weaker and that core inflation will fall much more quickly, which will persuade the Fed to cut rates more aggressively next year," says economist Paul Ashworth of Capital Economics.

Wednesday’s decision to stand pat provides a reprieve to consumers who have faced steady rate increases for credit cards, adjustable-rate mortgages and other loans. Yet Americans, especially seniors, are finally seeing healthy bank savings yields after years of meager returns.

Will inflation slow down soon?

Fed officials expect their preferred measure of annual inflation, the personal consumption expenditures index, to hold steady at 3.3% by year-end, slightly above their June estimate, according to their median forecast. By the end of 2024, consumer price increases are expected to drop to 2.5%, still somewhat higher than the Fed’s 2% benchmark.

A core measure that strips out volatile food and energy items and that the Fed follows more closely is expected to close out the year at 3.7%, below the prior 3.9% estimate.

Since summer 2022, inflation has fallen substantially. But in August, gasoline costs drove prices sharply higher and core inflation picked up as prices for rent, travel and other services accelerated, according to a different inflation gauge called the consumer price index.

How much will the economy grow this year?

Fed officials expect the economy to grow at a 2.1% annual rate this year, faster than their 1% projection in June, and 1.5% next year, above their prior 1.1% estimate.

The economy expanded a solid 2.1% in the second quarter and is projected to grow as much as 4% in the July-September period before slowing sharply later this year. The resumption of student loan payments suspended during COVID, a possible government shutdown and auto strikes will likely hamper growth, Goldman says.

Consumer spending has stayed strong despite high prices and borrowing costs now that average pay increases are finally outpacing inflation. But the student loan payments and the depletion of households’ pandemic-related savings are likely to take a bigger toll on consumption, economists say.

Will the job market slow down in 2023?

The historically low 3.8% unemployment rate is projected to end the year at that level, below the 4.1% previously forecast. It’s projected to climb to 4.1% by the end of 2024.

U.S. employers have added an average of 150,000 jobs a month since June. That’s half the pace recorded early this year but still solid. There are 1.5 job openings per unemployed American – down from two openings earlier in the year but still well above a balanced market of one vacancy per jobless worker.

Annual wage growth has fallen to 4.3% from 5.9% in March. Barclays notes, however, that the pace remains higher than the 3.5% needed to lower inflation to 2%.

In a speech last month at the Fed’s annual conference in Jackson Hole, Wyoming, Fed Chair Jerome Powell said officials could raise rates again if the economy and job market don’t weaken more substantially.

But he also said the Fed will move "carefully" as it weighs raising rates enough to lower inflation against going too far and tipping the economy into recession.

Want to know more about interest rates, inflation, and the economy? Keep reading.

COLA 2024

Those who receive Social Security will likely see their cost of living adjustment (COLA) bump up by 3.2% next year according to a new forecast made in the wake of last week’s report showing inflation increased in August.  That’s higher than the previous estimate of 3%.

While inflation has inched up each of the last two months and is hovering above the Federal Reserve’s target of 2%, the rate of price hikes has generally been dropping over the last year, which means the benefits adjustment is minimal, according to estimates from The Senior Citizens League, a nonprofit seniors group. 

Still, the updated increase would be higher than the 2.6% average seen over the past twenty years though far lower than the four-decade COLA high of  8.7% that Social Security recipients got in 2023.   

“The harsh reality is that the amount that the COLAs increase benefits in most years is meager at best,” said Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League.  

Is there any way to benefit from higher interest rates?

Yes. If you’re saving money in fixed-income assets, you’re probably getting a higher return on that money. The interest paid out on savings accounts, Treasuries and CDs has risen as the Fed has raised rates.

However, not all fixed-income assets are the same, warns banking expert Ken Tumin at DepositAccounts.com. Look here to find out what types of returns are available:

• Traditional brick-and-mortar savings accounts pay the least, around 0.45%.
• Online savings accounts yield an average 4.39%, with the highest at 5.30%.
• Money market mutual funds (MMFs) yields are higher, some near 5.27%.
• Some 7-month and 13-month CD Specials pay 4.75% to 5.00% APY, respectively. 
• Online longer-term CDs may not give as good a return, with the average online 5-year CD yield having dropped this year to 3.95% on September 1 from 4.04% on January 1.

Car payment calculator, mortgage payment calculator

Rising interest rates have contributed to the boost in auto loan prices and mortgage rates. You can calculate your car and mortgage payments on the Federal Reserve Bank of Dallas’ website. 

S&P 500

The S&P 500, the broadest stock market gauge index used to benchmark many mutual funds, dipped 0.94% Wednesday to 4,402.20.

Dow Jones Industrial Average

The Dow Jones Industrial Average, a stock market index of 30 large companies, ended the day down 0.22% at 34,440.88.

Nasdaq Composite 

The Nasdaq composite – a stock market index that includes almost all of the stocks listed on the exchange – dropped 1.53% Wednesday to 13,469.13.  

10-year Treasury yield

The Fed’s actions have pumped up the yield on the 10-year Treasury bond, a guide for setting interest on an average 30-year mortgage. The yield on the 10-year Treasury Wednesday reached levels not seen since 2007, up 0.03 percentage points at 4.399%.

Fed interest rates chart

What is hyperinflation?

Hyperinflation is when prices increase at very high rates. There’s no official threshold, according to the Federal Reserve Bank of St. Louis.

While the U.S. inflation rate hit 9.1% in June of 2022, this was not considered hyperinflation. (In one example of hyperinflation seen in Zimbabwe, the inflation rate was over 20,000%, according to the St. Louis Fed.)

Federal Reserve System definition 

The Federal Reserve System, also referred to as the Federal Reserve or Fed, is the central bank of the United States. 

What is the primary purpose of the Federal Reserve?

The Fed's responsibibilities include:

• Influencing money and credit conditions to help create jobs, stabilize prices and moderate long-term interest rates.
• Regulating banks and other financial institutions.
• Maintaining the financial system’s stability and containing systematic risk.
• Providing financial services to the U.S. government, U.S. financial institutions and foreign official institutions. 
• Helping operate and oversee the country’s payments systems.

Why was the Federal Reserve created?

The Federal Reserve was created by Congress in 1913, according to the Fed's website. President Woodrow Wilson signed the Federal Reserve Act into law that year “to provide the nation with a safer, more flexible, and more stable monetary and financial system.”

Where is the Federal Reserve located?

There are 12 Federal Reserve banks located in Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco. The board is headquartered in Washington, D.C.

Who controls the Federal Reserve?

The governing body of the Federal Reserve System is the seven-member Board of Governors. Each governor is nominated by the U.S. president and their positions are confirmed by the Senate. Their terms are staggered and last 14 years. 

The chair is also appointed by the President and confirmed by the Senate, but his or her term is only four years long. Jerome Powell is the current chair.  

Each member of the board serves on the FOMC, which is the body within the Fed that sets the monetary policy. 

U.S. inflation rate by month

The inflation rate has plunged, tumbling by more than half from its peak of 9.1% in June 2022. But it’s still above the 2% target preferred by the Federal Reserve. Here's where the U.S. inflation rate has stood each month since May 2022:

• May 2022: 8.6%
• June 2022: 9.1%
• July 2022: 8.5%
• August 2022: 8.3%
• September 2022: 8.2%
• October 2022: 7.7%
• November 2022: 7.1%
• December 2022: 6.5%
• January 2023: 6.4%
• February 2023: 6.0%
• March 2023: 5.0&
• April 2023: 4.9%
• May 2023: 4.0%
• June 2023: 3.0%
• July 2023: 3.2%
• August 2023: 3.7%

Will my credit card debt be affected?

The average APR on a new credit card offer is 24.45%, the highest since at least 2019 when LendingTree began tallying this data, and likely to continue creeping higher in the next few months, said Matt Schulz, LendingTree credit industry analyst. 

If you have $5,000 in debt on a card with a 24.45% APR, and a $250 monthly payment, you’ll pay $1,487 in interest and take 26 months to pay off the balance.

For those who carry a credit card balance over month to month, the average APR is a record 22.16%, according to Fed data. That’s up from 16.17% in the first three months of 2022 when the Fed began raising rates.  

Someone with $5,000 in credit card debt on a card with a 22.16% APR and a $250 monthly payment would pay $1,298 in interest and take 26 months to pay off the balance.

If you’re in this boat, having to pay down debt amid soaring rates, take steps now to mitigate the pain. For example, take advantage of 0% balance transfer credit cards or ask your issuer for a lower APR. More than 3 out of 4 cardholders who asked for a lower APR for their credit card in the past year got one, Schulz said. The average reduction was about 6 percentage points, which could save you $500 or more depending on how much you owe, he said.

When is the next Fed meeting for 2023?

The Fed’s 2023 meeting schedule is: 

• Sept. 19-20
• Oct. 31-Nov. 1
• Dec. 12-13

What’s the unemployment rate?

The jobless rate ticked up to 3.8% in August, the highest since February 2022.  And there were 110,000 fewer jobs added to the economy in June and July than first reported, showing that the jobs market was not as robust as initially believed. 

Still, August’s bump in unemployment, which increased from 3.5% the month before, reflected an influx of more people who were looking for work. And the U.S. had 187,000 more jobs in August than in July, according to a separate survey, the Labor Department said. 

What is CPI?

In August, the Consumer Price Index (CPI) ‒ a gauge of the average change in prices for various products and services ‒ was 3.7%, an increase largely spurred by a spike in the cost of gas.

Gas prices increased 10.6% though they were 3.3% lower than a year earlier and far below the $5 peak also reached in 2022. And filling up your tank isn’t likely to get cheaper any time soon as the global economic forecast becomes more upbeat and OPEC continues to decrease oil production.   

Food prices were also up in August, though not by as much, rising 0.3% in August. The price of bacon increased 4%,  while chicken cost 1.3% more. 

Some staples however became more affordable. The price of eggs, for instance, was inflated for months for reasons related to the bird-flu. But in August, egg prices dropped 2.5%. It was the sixth monthly price dip in a row.

Why is CPI important?

The Federal Reserve keeps its eye on two primary aspects of the economy, price stability and maximum employment, and those are the main factors it considers for its interest-rate decisions.  The CPI is a key measure the Fed looks at to help determine if prices are “stable.’’

What is the difference between CPI and core CPI?

Core prices don’t count food and energy items, whose costs tend to be volatile, giving a more accurate assessment of longer-term trends.

What is a recession? 

A recession is "a significant decline in economic activity that spreads across the economy and lasts more than a few months," according to Michael Pugliese, an economist with Wells Fargo. 

The nonprofit National Bureau of Economic Research, which designates when a recession occurred, takes many indicators into account, including the unemployment rate, consumer spending, retail sales and industrial production.

The last two recessions occurred when the economy was jolted by a housing crisis in 2008/2009 and then the COVID-19 pandemic in 2020, which led to massive layoffs as many businesses faltered or were forced to close when people hunkered down in their homes. 

Many feared that the U.S. would tip into a recession because of the aggressive rate hikes initiated by the Federal Reserve to cool an economy that rapidly ramped up as the pandemic eased. But the economy has remained surprisingly strong as consumers continue to spend and payrolls grow, and fears of a recession are waning. 

Will we have a recession? 

The odds appear to increasingly be, no. But some areas of the country are more vulnerable than others. 

With economic and job growth staying strong, the risk of a national recession by the middle of next year is receding. But the West and South, which saw prices surge during the pandemic as remote workers flocked to less crowded locales, are now more susceptible to price dips, according to Moody’s Analytics.

“There’s more risk in places that have grown rapidly,” says Moody’s regional economist Adam Kamins. “There’s a little more risk of a bubble forming.” 

Why does the Fed raise interest rates?

The federal funds rate is what banks charge each other for overnight loans. If that rate increases, banks are likely to pass along that extra cost, meaning it becomes more expensive to borrow as rates increase on everything from credit cards to adjustable rate mortgages. That’s why the funds rate is the primary lever the Federal Reserve uses to slow inflation.  

Businesses and consumers borrow less when loans cost more, and that means an overheated economy can cool down and the rate of price increases may decline.  

What is inflation? 

Inflation is a "generalized rise in prices," according to Josh Bivens, director of research at the Economic Policy Institute, a left-leaning think tank headquartered in Washington D.C. 

Goods ranging from gas to groceries to rent are all potentially affected by inflation. But it is the cumulative impact that dictates what the inflation rate actually is. 

"Inflation, though, really is meant to only refer to all goods and services, together, rising in price by some common amount," Bivens said. 

The Federal Reserve’s inflation target is 2%, which means businesses can boost prices by 2% annually and that won’t be a financial hardship for consumers. Cost of living increases for workers are also expected to meet that goal to make sure employees can keep up with the rising cost of products and services.   

Does raising interest rates hurt the economy?

In the long run it does, according to at least two economics and finance professors who presented a paper on the issue at the Fed’s annual conference in Jackson Hole, Wyoming last month.

The Fed’s aim when it boosts interest rates is to make it more expensive for consumers and businesses to borrow, cooling the economy and ultimately curbing inflation. But such moves can also stifle broader economic output and the potential for growth over the long term, the paper said.

When will inflation go down?

Inflation has come down significantly since it reached a four-decade high of 9.1% in June 2022. But the rate of price hikes has remained stubbornly above the Fed’s 2% goal. That’s partly because while the prices of some products have dipped, and the supply chain snags that emerged during the pandemic have mostly cleared, fixing a car, leisure activities and other services have become more expensive, largely due to rising wages. 

What causes inflation? 

Many different factors can lead to inflation. Most typically, it results from "a macroeconomic excess of spending over the economy's relative ability to produce goods and services," said Josh Bivens, the director of research at the Economic Policy Institute, a left-leaning think tank based in Washington D.C.  

That means more people are spending money on products or services that are in short supply given the demand, leading producers to boost prices.

"If everyone in the economy, tomorrow, decided they weren't going to save any money from their paychecks, and they're just going to spend every last dollar out of the blue, they would all run to the stores and try to buy things," Bivens said. "But, producers haven't produced enough to accommodate that big surge of across-the-board spending. So, you would see prices bid up." 

Too few producers can also spur a bout of inflation. A shortage of workers to deliver the desired products and services can also spark a hike in prices, Bivens said.

Finally, there’s also a level of "built-in inflation" within economies, with central banks like the Fed wanting inflation to stay at a certain level. In the U.S., that goal is 2%, meaning businesses can boost prices by 2% annually, and that shouldn’t be a hardship for consumers. That’s also the typical range for cost of living boosts by employers. 

CD interest rate calculator 

While higher interest rates hurt borrowers, the opposite is true for savers who can actually earn a little more for their money.

The interest paid out on everything from savings accounts to CDs to Treasuries has risen as the Fed has raised rates. When it comes to CDs, here’s the interest rate rundown from banking expert Ken Tumin at DepositAccounts.com. 

• Some 7-month and 13-month CD Specials pay 4.75% to 5.00% APY, respectively. However, remember: “These can be a good deal for savers, but savers have to make sure to close the CD Special at maturity.” Tumin said. “Typically, CD Specials will auto-renew into a low-rate standard CD. If the customer misses the grace period at maturity, their funds will be locked into a low-rate standard CD,” which can be much less lucrative.
• Online longer-term CDs may not be as worthwhile, with the average online 5-year CD yield having fallen this year to 3.95% on September 1 from 4.04% on January 1.

Traditional savings account typical interest 

The typical interest on a traditional brick-and-mortar savings account is roughly 0.45%. That’s the lowest return among fixed-income assets. 

Is the Federal Reserve part of the government?

Yes. The Federal Reserve System is the central bank of the United States.

Oil prices today

The cost of crude oil was down 1.02% Wednesday, closing at $90.27.

Still, generally higher oil prices are pumping up the price of gas according to AAA, and in turn, gas was the primary driver of August’s higher inflation rate. Gas prices increased 10.6% last month though they were 3.3% lower than a year earlier and far below the $5 peak also reached in 2022.

“Our findings suggest that monetary policy may affect the productive capacity of the economy in the longer term,” wrote Yueran Ma and Kaspar Zimmermann, economics and finance professors at the University of Chicago. “A slower pace of innovation may then have lasting effects.”

Fed rate hike history

Since March 2022, the Fed has increased its benchmark federal funds rate 11 times, to a range of 5.25% to 5.5%. It boosted the key rate at 10 meetings in a row - the steepest streak of rate hikes in four decades. It paused those increases in June but resumed in July with another quarter-point hike.  

Inflation rate 

Overall, consumer prices increased 3.7% annually in August, the second straight monthly rise after annual inflation was on the decline 12 months in a row. 

A spike in gas prices was the main reason for the broader boost.  Meanwhile, rising rents and increased costs to travel and to access other services were tempered by the shrinking prices of used cars, furniture and other products. 

Mortgage rates: Will they be affected by Fed's rate decision?

The Fed doesn’t directly set mortgage rates. But they have pumped up the yield on the 10-year treasury bond, a guide for setting interest on an average 30-year loan, and that is helping fuel higher mortgage rates, according to experts. 

Recently, mortgage rates have been through the roof. During the last week of August, mortgage rates were 7.2%, the highest they’ve been in 21 years, according to Freddie Mac. The interest rate on a 30-year fixed-rate mortgage hasn’t topped 7% since November 2022. 

Fed dot plot 

If you look at the Fed's Summary of Economic Projections report, you’ll find the Fed's dot plot. The dot plot is a visual representation of where individual Fed officials predict interest rates will be for years down the line. The dot plot was first created in late 2011 and was intended to add additional transparency to the Fed's decisions about monetary policy. In the latest dot plot, the majority of Fed officials indicated a target Fed funds rate between 4% to 4.75% would be appropriate for 2023. By 2024, they see rates going down to a range between 3% to 4%.

Will Fed raise rates in September 2023?

There’s no change expected to the current key rate of 5.25% to 5.5%.  

What does the Federal Reserve do?

The Federal Reserve is the hub of the nation’s banking system, working behind the scenes to make sure the economy is functioning and stable, and that there is a balance between the nation’s financial vitality and consumer interests. Its goal is “maximum employment, stable prices, and moderate long-term interest rates,’’ according to its website. 

Current Fed interest rate

After a one month pause that interrupted the most significant flurry of interest rate hikes in four decades, the Fed resumed its increases in July, boosting the key rate by a quarter point  to a range of 5.25% to 5.5%, the highest level in 22 years. The Fed did not meet in August. 

Fed speech today

Fed Chairman Jerome Powell is expected to speak at 2:30 p.m. ET Wednesday. 

Inflation heats up again:At this Fed meeting, is an interest rate hike on the table?

Social Security:Social Security COLA 2024 prediction rises with latest CPI report, inflation data