Fed slows interest rate increases; more hikes expected

As expected, and heavily telegraphed, the Federal Reserve Open Market Committee elected to raise interest rates a quarter point, the smallest tweak in nearly a year as it battles burgeoning inflation. But, despite encouraging economic indicators, Fed Chairman Jerome Powell made it clear we haven’t seen the end of rate hikes, though future once will be small, like February’s.

In moving the federal funds rate by 0.25 percentage point to a target range of 4.5%-4.75%, the highest since October 2007, the Fed said, “Inflation has eased somewhat but remains elevated.”

So clearly more rate hikes are pending; moves intended to slow economic activity, raise the costs of doing business, pushing credit card and mortgage rates to new highs, and denting investment, savings, and retirement accounts all in the name of stopping runaway inflation. Are more hikes really necessary? It depends on who you ask. Chairman Powell conceded that past efforts to whip inflation are working and finally impacting the economy.

“We can say for the very first time that the deflationary process has started,” said Powell in a post-announcement press conference. “This is a good thing.”

But it’s only begun, he said, and too many economic indicators still are worrisome and showing little sign of abating.

"With inflation at 6.5%, we still have quite a distance to travel before worrying about 3-4% inflation,” said Phillip Neuhart, director of market and economic research at First Citizens Wealth Management. “That said, after declining from its current 6.5% level, if inflation were to persist in the 3% to 4% range over a period of months or even quarters, the Fed would hesitate to materially ease monetary policy and, depending on the macro picture, might resume tightening."

Powell and others think it’s possible the Fed could steer the economy to its target 2% level this year, with some caveats.

“It’s probably not the most likely outcome, but we think it’s possible,” he said.

Some feel there’s enough positive signs in the economy for the Fed to take a breather and halt future increases, a point clearly at odds with Powell’s statements.

“I think the Federal Reserve thus far has done a wonderful job of bringing interest rates and inflation back to a normal, healthy, financial balanced economy,” says Clark Kendall, president & CEO of Kendall Capital in Rockville, MD. “At this point, the Fed needs to pause, watch, and reflect on their actions over the past 12 months.”

Along with cooling inflation, Kendall pointed to auto prices and unemployment falling, corporate profits at record highs, housing softening, and GDP numbers showing a strong and expanding economy.

“We’re going to be cautious about sending signals and declaring the game is won."Jerome Powell, Fed chairman

But Powell said it’s still too early to declare victory.

“We’re going to be cautious about sending signals and declaring the game is won,” he said. “We’re still in the early stages and it has to spread through the entire economy.”

Data could change his outlook he said, but he said cuts in interest rates would likely not “be appropriate” this year.

Two of the most impactful elements affecting the Fed’s thinking are the state of the labor market and the war in Ukraine, experts said.

“Remember that the Fed’s goal is explicitly to slow the economy and allow unemployment to rise,” said Gene Balas, Investment Strategist at Signature Estate and Investment Advisers. “Currently, there are more job openings than there are jobseekers to fill them.”

That tightness, Balas said, can potentially drive up wage costs and contribute to higher inflation. As such, the Fed would like to slow the economy further to reduce the number of job openings so that a tight labor market doesn’t generate more inflation.

Recession possibility looms

The possibility of pushing the economy into recession still looms, of course, but most experts don’t see it happening.

The Fed want the market to understand it will do anything to take this back to 2% since their biggest asset is credibility, said Santiago Guzman, CEO of Boston capital management firm Cap8. “But if the economy slows significantly and unemployment rises, we don’t see inflation significantly above 2%. In our view, stagflation is not a scenario under the current economic conditions and structure. We may have a short period with both soft economic readings and higher inflation, but we don’t believe it will last.”

In some respects, the fluctuating economy and rising interest rates presents opportunity for investors and savers.

“It isn’t all doom and gloom,” said Ben McLaughlin, financial expert at SaveBetter.com. “Overall top-yielding online savings accounts are now peaking above 4%. We currently offer two high yield savings accounts at 4.25% and certificates of deposits up to 5% depending on the term.”

“The best advice is to shop around for the best rates across mortgages, credit cards and savings accounts,” McLaughlin said, adding, “If you’re not shopping around then it’s very likely that you are still paying higher rates on your outgoings and earning back next to nothing on your returns.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].