There is little doubt we are well into an interest rate tightening cycle 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.
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 few months.
Here is what market pundits from various sources are predicting and how related downstream rates will likely be revised up over the next few months.
July 2022 update: With a record high inflation reading (see next section) this month, I have updated the forecast for the July 27th Fed hike from 0.5% to 0.75%. A full 100 bps is also a 20% possibility.
|Month||Max Fed Rate||Mortgages|
(30yr Fixed /5yr ARM)
|High Yield |
|Credit Card |
|Jun’22||1.75%||5.92% / 4.05%||0.9%||18.1%|
|Jul’22||2.50% (+75 bps)||6.25% / 4.25%||1.2%||18.5%|
|Sep’22||3% (+50 bps)||6.35% / 4.28%||1.3%||18.9%|
|Nov’22||3.5% (+50 bps)||6.5% / 4.45%||1.5%||19.5%|
|Dec’22||3.75% (+25 bps)||6.6% / 4.58%||1.7%||19.9%|
The baseline I am using for the table above is the June 2022 Federal Reserve short-term funds rate which was raised by 0.75% (or 75 basis points) to a range of 1.5% to 1.75%. This was the largest rate increase since 1994.
Fed Chair Jerome Powell has indicated more rates will come in the next few FOMC meetings to combat actual and expected inflation.
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.
Note there are no meetings in August and October 2022, so no data has been provided for those months.
Other product rate data points are based on information from various sources and my predictions based on observed trends. Please treat all data provided as indicative.
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.
Inflation Hits a Record High in Latest Reading
The year over year June Consumer Price Index (CPI) reading from the US Bureau of Labor Statistics reflected a record 41 year high of 9.1%, which was well above the expected 8.8% reading. It was also 1.3% higher than a month ago.
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%), it does 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.
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 reduct 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.