The Federal Reserve paused its aggressive rate hiking campaign Wednesday for the first time in 18 months but signaled emphatically that its battle against inflation isn’t over.
The central bank forecast another half percentage point in rate increases this year, according to officials’ median estimate. That represents a quarter point more than economists anticipated and a half point more than the Fed itself projected in March.
Officials’ hard-nosed stance raises a pointed question: When will interest rates start coming down?
How many times has the Fed raised rates?
Since March 2022, the Fed has hiked its benchmark federal funds rate at 10 straight meetings by a total of 5 percentage points. That’s the sharpest flurry of rate increases in four decades.
Why does the Fed raise interest rates?
The Fed lifts its key rate to make it more expensive for consumers and businesses to borrow, theoretically curtailing spending and putting less upward pressure on consumer prices.
How much is the Fed interest rate today?
The fed funds rate remains at 5% to 5.25% after Fed policymakers decided to keep it unchanged on Wednesday to assess how their rate increases so far are affecting the economy. In March 2022, the rate was still near zero as officials stayed focused on juicing the economy after a pandemic-induced recession.
Why does the Fed want to raise rates further?
Inflation overall has come down steadily. But a measure of inflation that strips out volatile food and energy items and that the Fed follows closely, has stayed high for longer than expected. The annual rise in core personal consumption expenditure (PCE) prices – the Fed’s preferred inflation measure -- actually ticked up to 4.7% in April from 4.6% in December. Sharp increases in rent and used cars have fueled the core reading.
The Fed believes it needs to continue to push up rates since inflation has responded only modestly to its previous hikes.
What is the market expectation for Fed interest rates
Financial markets reckon the central bank will hoist its key rate again in July. But they don’t buy the Fed’s prediction of a second additional increase this year. Markets figure the economy and inflation will slow substantially in the coming months, keeping the Fed on hold.
How long until interest rates go back down?
Although the Fed hasn’t predicted any rate cuts in 2023, markets had been betting that officials would be forced to lower rates this year as the economy slipped into a recession, largely because of the Fed’s bold moves.
But consumers have continued spending despite high interest rates and inflation, keeping the economy and job market resilient. And now that the Fed is forecasting two more quarter-point rate hikes this year, markets have pushed out their projection for the first rate cut to January. By then, the Fed figures core PCE inflation will have fallen to 3.9% and many economists believe a mild recession will be underway.
The Fed estimates it will reduce its key rate to 4.6% by the end of next year, though it's not clear when it thinks it might start cutting.
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Why is cutting rates good?
Lower interest rates ripple through the economy, pushing down rates for mortgages, home equity lines of credit, consumer and auto loans and other consumer and business loans. Thirty-year fixed mortgage rates are averaging about 6.7%, up from about 3.7% in February 2022.
Lower interest rates also make bonds less attractive, prodding investors to move money to equities and bolstering the stock market.
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