Hi y’all —
You know that moment when you’re riding a roller coaster that’s just reached the top of the first drop and you’re paused there, teetering? You’re anxious and excited. You can see the downward swoop of the track ahead but you don’t know what to expect: when you’ll finally lurch forward, how terrifying it’ll be... or whether you’re going to throw up?
That’s where we are with the Federal Reserve right now.
The U.S. central banking system has been raising rates for over a year, taking the federal funds rate from 0 to 0.25% at the start of March 2022 to a target range of 5 to 5.25% this month. The 10 consecutive rate hikes have all been in hopes of curbing inflation — and soon, they may taper off.
The nation's record-high inflation has been slowly abating, and the recent bank drama has helped to cool down the economy a bit. But I’ve become accustomed to living in a high-interest-rate environment. And now that I’m peering over the edge, I’m getting worried.
Is the Fed about to stop raising rates? What will it mean for me when it does?
The first thing to realize is that nobody knows exactly what’s next, according to David Bieri, an associate professor of economics at Virginia Tech. Even Fed Chair Jerome Powell has been playing it coy, saying at the most recent Fed news conference that “a decision on a pause was not made,” though “we may not be far off.”
Bieri says one complicating factor is that the Fed has a dual mandate: to promote a healthy economy (slash labor market) and maintain stable prices. Right now, he points out, “inflation is still way above the 2% where they want it to be,” and there’s a “distinct possibility of a recession on the horizon.”
That puts the Fed in a tight spot, especially because it only has a blunt tool at its disposal.
“You have opposing forces,” Bieri says. “If you want to fight inflation, you have to keep rates high. If you want to fight a recession — or fight financial instability — you potentially need to lower rates. So what do you do?”
When the Fed raises rates, like it has been, it makes borrowing money more expensive, indirectly driving up mortgage rates, savings rates and the cost of credit card borrowing.
If it were to slash them, making borrowing cheaper, the opposite could happen: Demand for goods and services could surge, fueling asset price bubbles bound to burst and generating future problems.
Despite the last year of hikes, inflation has proven stubborn. It reached 4.9% in April, and Alex Horenstein, an associate professor of economics at the University of Miami, says he doesn’t think it’ll drop drastically anytime soon.
As such, the Fed’s hands are tied.
“I don't see the Fed being able to decrease interest rates when inflation is around 5%,” Horenstein says. “Once the inflationary process starts, it's very difficult to stop without hurting the economy.” (Which would be rough right before an election.)
