There is little doubt we are well into an extended interest rate tightening cycle to fight rampant inflation with the Federal Reserve Open Market Committee (FOMC) aggressively raising short-term federal fund rates.
This is in turn affects many other short and longer term product rates (e.g Mortgages) which directly impact consumers and businesses.
Given the importance of Fed rates hikes (actual and predicted) on the overall economy, I’ll use this article to provide regular updates and news on the latest forecasts. You can subscribe to get the latest news.
November 2022 Update – Getting Ready for More Rate Hikes
The Fed raised rates again by 0.75%, as expected, and signaled that they will continue with their aggressive rate hike policy as inflation is not slowing as much as they would like.
However there is market and political pressure for the Fed to temper future rate raises and given existing raises time to work in slowing the overall economy. The challenge is going to be balancing monetary policy in the next few quarters to moderate inflation without causing a full blown recession.
The “soft-landing” Fed scenario however is looking less likely as interest rates are forecast to continue rising as inflation and employment remains stubbornly high. However many are hoping the Fed will slow or “step-down” their rate hike policy. I believe this will happen and so forecasting smaller hikes in the next two meetings (see table below).
Most forecasts now predict a recession in 2023, the question is how long and deep will it last. It looks like we will have finally have the COVID recession we were supposed to have in 2020-2021, which federal and monetary policy bailed us out of.
Latest Fed Rate Changes and Forecasts
The table below is my viewpoint, based on what market pundits from various sources are predicting, on how the short-term Fed rate will change over the next few meetings and impact downstream mortgage, savings and credit card rates.
Please treat all data provided as indicative and share your thoughts in the comments forum below the article.
|Max Fed Rate||Mortgages|
(30yr Fixed /5yr ARM)
|High Yield |
|Credit Card |
|Jun’22||1.75%||5.92% / 4.05%||0.9%||17.1%|
|Jul’22||2.50% (+75 bps)||5.85% / 4%||1.2%||17.5%|
|Sep’22||3.25% (+75 bps)||6.05% / 4%||1.8%||18.1%|
|Nov’22||4% (+75 bps)||7.0% / 4.8%||3.5%||19.4%|
|Dec’22 (est)||4.50% (+50 bps)||7.4% / 5.25%||3.9%||20.7%|
|Feb’23 (est)||4.75% (+25bps)||7.8% / 5.35%||4%||22%|
|Mar’23 (est)||5% (+25bps)||8.1% / 5.85%||4.25%||23.5%|
I will continue to update the table above with official/actual updates and in light of changing market information. You can get the latest updates via the options below.
September 2022 Rate Update – How High Will Rates Go?
The question is how long will this tightening cycle go on for and what could rates look like over the next several months.
With persistent high inflation (see next section) the Fed hiked rates by another 0.75%, as forecasted. This was the fifth consecutive raise in 2022.
Fed Chair Jerome Powell has indicated more rates will come in the next few FOMC meetings to combat actual and expected inflation, with short-term rates will rise above 4.50% by the end of 2023. Around one third of the 19 FOMC members expect rates to stay above this level through 2024.
Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.FOMC statement
They have said taming inflation, via raising rates, is their number one focus so I expect an aggressive approach over the next few months, which will most likely result in a significant economic slowdown.
Inflation Hits a Record High in Latest Reading
The latest year over year Consumer Price Index (CPI) reading from the US Bureau of Labor Statistics reflected a record 41 year high of 8.3%, which was well above the expected reading. It was however lower than the prior month’s increase, signaling that maybe the Fed’s interest rate actions are pushing inflation lower.
The inflation reading reflects the rising costs of food, housing, energy and related services. Coupled with low unemployment and higher than normal consumer spending, a perfect storm for inflation has resulted.
Most economic pundits are saying a recession, driven by much higher Fed rates, is the only way to break the stubbornly high inflation cycle.
What will happen to the Stock Market and Is a Recession Likely?
“The U.S. economy for now is strong. Spending is strong. Consumers are in good shape. Businesses are in good shape. Monetary policy is famously a blunt tool. And there’s risk that weaker outcomes [ a recession] are certainly possible. But they’re not our intent.”Fed Chair Jerome H. Powell
Unfortunately stock market volatility is collateral damage when it comes to rising rates. Since the Federal Reserve’s mandate is only around keeping prices stable (inflation around 2%) and maximizing employment (i.e. unemployment rate around 4%), they do not directly focus on equity and bond markets which have fallen by over 25% this year.
Stock and bond markets have been falling amidst the specter of higher rates that could push the economy into a recession.
Inflation and high interest rates generally suppress consumer demand which leads to a slow down in economic growth, which if negative over two quarters equals a recession.
Where the federal reserve gets concerned about financial markets is if companies start laying off people in order to preserve cash and bolster balance sheets – factors that affect stock valuations.
So if markets keep crashing as in recent months, it is likely the Federal Reserve may slow down its rate of rate increases – assuming inflation stabilizes. Otherwise 2023 could see more of the same Fed actions.
Fed Rates Impacting Mortgage, Savings and Credit Rates
When the Fed uses it’s monetary tools to set short-term interest rates, it creates a financial rate cascade which affects all types of consumer and busines product interest rates.
For example because of higher Fed target short-term rates, the borrowing costs for banks rises, which in turn means they have to pass on those higher rates (costs of borrowing) to consumers and businesses.
This results in higher rates for mortgages, car loans and credit card APYs. Monthly payments for many of these products have already risen by over 30% this year alone. This is why it is a good idea to pay down high interest rate debt in rising inflation environments.
According to WalletHub, the average household carries a credit card balance of nearly $9,000 which means every 1% rate increase works out to roughly an extra $100 in annualized interest payments.
Homeowners, especially new home buyers, will feel the rapid interest rate rises with the payment on a median priced home ($404,000) with a 20% down payment and 6% interest rate on a 30yr loan now requiring a $2,400 monthly payment, excluding taxes. The monthly payment is nearly 15% higher than it was in early 2022.
The silver lining of higher rates though is that savings rate on high yield accounts and money market funds also rise, though this seems to happen much slower than with products that generate revenue for financial institutions (not surprisingly!)
In addition to raising the Federal funds rate, the Federal Reserve will be using its other economic tools to tighten available credit by selling Treasury and mortgage-backed securities.
This is known as “quantitative tightening,” or QT, in order to pull money out of the economic system to reduce credit and dampen demand.
This is the opposite of Quantitative Easing, which was used to stimulate the economy after the 2008-2009 GFC and 2020 COVID shocks.
The Fed indicated, in their latest meeting, that QT will take place against it’s existing $9 trillion portfolio to the tune of $47.5 billion per month in June, July and August, and then by $95 billion per month after that.
The new economic environment we find ourselves in now is uncomfortable for many, following years of low and stable interest rates which led to record asset valuations, equity prices and strong business conditions.
But rather than fight the fed as the saying goes, one must learn to adapt to a higher rate environment. I’ll continue to post articles on how to do this and you can follow along via the options below.