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As grocery and gas prices decline, the Federal Reserve is expected to leave the key interest rate where it stands Wednesday, pausing a historic streak of hikes that were meant to slow inflation but also threatened to tip the economy into recession.
Still, as the economy continues to send mixed signals, several forecasters say at least one more hike is likely this year as inflation remains high and job growth continues to be strong.
Fed Chair Jerome Powell has said officials want to assess the delayed effects of the rate increases on the economy as well as the impact of deposit runs that triggered the collapse of three regional banks. The banking crisis, he said, has toughened lending standards and could weaken the economy, leaving less work for the Fed.
Fed decision this week
The Fed’s interest-rate decision is announced at 2 p.m. ET on Wednesday.
Protect your assets: Best high-yield savings accounts of 2023
Fed Powell speech today
Fed Chairman Jerome Powell’s media conference will begin at 2:30 p.m. ET on Wednesday. USA TODAY economics reporter Paul Davidson will cover the event in person.
How will CD rates be affected by the Fed?
CD yields have soared in the past year as the Fed boosted interest rates, and more rate hikes would probably continue to make CDs more lucrative, particularly on short-term deposits.
But if the Fed pauses rate increases as many economists expect, banks will likely do the same and limit CD rate hikes.
On the other hand, if the economy – which has proven resilient – avoids a recession, CD rates may start to inch up, especially those with longer-term rates.
Housing interest rates today
The 30-year fixed mortgage rate on Wednesday is 7.13% while a 15-year fixed-rate mortgage is 6.30%. For 30-year jumbo mortgages, rates are 6.83%.
Mortgage rates for a 30-year fixed-rate loans have dropped from 7.24% last week, according to data from Curinos. Those rates sat at 7.01% last month. The 30-year fixed-rate average on Wednesday is 1.12 percentage points below the 52-week peak of 8.25% and 1.25 percentage points higher than the 52-week trough of 5.88%.
Treasury bonds interest rate
In the bond market, yields on the 10-year Treasury were up 3.79% prior to the Fed announcing its interest rate decision. Treasury bonds help set rates for mortgages and other important loans.
Will rents continue to go down?
Maybe.
“At the beginning of this year, landlords were beginning to drop rents. And that means that leases that are coming online now in June, for example, would reflect those lower rents,’’ says Bright MLS Economist Lisa Sturtevant. “If rents indeed are coming down in a systematic way, we should see that reflected in the CPI as we head through the summer.”
But there’s also the possibility that rents may not drop by much.“ As the economy has been changing and landlords have been sort of reevaluating, we may see them keeping rents firmer than we thought they would, because of this increased demand for rental units,” she says.
Why is there a disconnect between current rents and CPI shelter costs?
Once again, housing costs were the biggest contributors to inflation, according to data from the CPI. Overall shelter costs were 8% higher than a year ago and rent inflation was 8.7% according to the report.
But private-sector indexes like Redfin, Zillow and Redfin say rent prices are weakening. So what’s the disconnect?
Rents slipped 1% nationwide in May as compared to a year earlier −the steepest drop since 2020−as a building boom boosted supply and anxiousness about the economy cooled demand, according to Redfin.
But the bureau measures changes in the cost of housing for both renters and homeowners as well as lodging away from home and tenants’ and household insurance. The cost to rent a primary residence is weighted the most.
If a housing unit’s owners live there, the bureau computes what it would cost the owner to rent a similar place, known as Owners’ Equivalent Rent (OER). The CPI program collects rent data from each rental unit every six months since rents are locked in place for a given lease term. It also allows for a larger sample, according to the Bureau of Labor Services (BLS).
However, in a fast moving, volatile housing market, that gauge can seem outdated compared to private indexes that look at current leases.
Are we in a recession?
Most top economists say no. Housing sales are flagging and home prices are beginning to dip because of steep mortgage rates. Manufacturing activity has also contracted seven months in row, partly because high interest rates have crimped business capital spending.
But consumer spending, which makes up roughly 70% of GDP, has been surprisingly robust, rising 0.5% in April after adjusting for inflation. And the most important economic indicator, employment, also remains strong, with the public and private sector adding an average of 283,000 positions each month from March through May. Businesses are also keeping their staffs intact instead of laying them off, despite dwindling sales.
Taking all those factors into account, the bottom line is the economy is slowing down, but it’s not shrinking. GDP grew at a 1.3% annual rate in the first quarter, and it’s forecast to grow 1% in the current quarter, according to S&P Global Market Intelligence.
Fed dot plot
Dot plots are the way the Fed indicates its benchmark federal funds interest rate outlook at some Federal Open Market Committee (FOMC) meetings. FOMC members put dots on a chart pinpointing their projections for interest rates in upcoming years.
S&P and Nasdaq
Markets were mixed in morning trading as investors awaited the Fed’s interest rate decision. The S&P 500 was up 0.19% and the Nasdaq rose 0.13%, while the Dow Jones Industrial Average (DJIA) was down slightly by 0.27%.
Fed rate hike history
At the Fed’s last meeting in May, the Central Bank increased interest rates to a range of 5% to 5.25%, it’s tenth hike in a row.
The constant stream of increases is in sharp contrast to the height of the COVID-19 pandemic when rates hovered near zero as the economy ground to a virtual halt. In March 2022, the rate was bumped up to a quarter percentage point. In May, it increased by 0.50 percentage point, followed by four hikes in a row of 0.75% percentage point each.
The last hike of 2022 was half a percentage point.
What is the U.S. inflation rate month by month?
The Inflation rate has dropped by more than half from its peak of 9.1% in June, 2022. Here’s a look at the inflation rate in the U.S. by month since May 2022:
- May 2022: 8.6%
- June 2022: 9.1%
- July 2022: 8.5%
- Aug 2022: 8.3%
- Sept 2022: 8.2%
- Oct 2022: 7.7%
- Nov 2022: 7.1%
- Dec 2022: 6.5%
- Jan 2023: 6.4%
- Feb 2023: 6.0%
- Mar 2023: 5.0&
- Apr 2023: 4.9%
- May 2023: 4.0%
Why is CPI important?
The Federal Reserve is focused on two key elements of the economy: price stability and maximum employment. And those are the primary drivers of its interest-rate decisions. While its inflation target is roughly 2%, the Fed also takes the CPI into account to decide if prices are “stable.’’
What is CPI?
The Consumer Price Index (CPI) is a gauge of the average change in prices for certain products and services during a period of time according to the Bureau of Labor Services.
Will mortgage rates be affected by Fed’s rate decision?
While mortgage rates doubled following the first few rate hikes last year, the most recent increases have had very little impact.
“Each month when the Federal Reserve has raised rates most of the time the mortgage market has already baked in those rate increases because it’s been very clear what the Federal Reserve had intended to do,” says Bright MLS Economist Lisa Sturtevant.
Still, anything that introduces uncertainty into the economy can cause mortgage rates to fluctuate.
Housing interest rates
Mortgage rates have been trending roughly the same across the board. Here were the average mortgage rates on June 13:
- 30-year fixed: 7.19%
- 15-year fixed: 6.36%
- 30-year jumbo: 6.84%
The 30-year fixed mortgage rate was 7.19% on Tuesday, lower than last week’s 7.24%, according to data from Curinos, but an uptick from last month’s 6.88%. Last year around the same time, 30-year fixed rates were 5.02%, which makes Tuesday’s rate significantly higher than it was a year ago.
At the current 30-year fixed rate, you’ll pay about $678 each month for every $100,000 you borrow — down from about $681 last week.
Current Fed funds rate
In May, the Fed hiked the key rate to a range of 5% to 5.25%, the highest in 17 years. Since the central bank raised the rate from close to zero in March 2022, hikes have been constant, with the Fed boosting the rate nine more times to ease inflation which reached a four-decade high last June in the midst of the COVID-19 pandemic.
Will the Fed cut interest rates?
It’s doubtful that the Fed will cut rates, according to a Vanguard forecast based on a machine learning model. Though markets predict the Fed will clip its rate by more than half a percentage point by the end of 2023 based on bonds and futures contracts prices, Vanguard senior economist Asawari Sathe says that probably will not occur.
“We believe inflation will continue to moderate but remain above 3% through year-end, and unemployment will trend higher to a still reasonable 4.5%,” she said in an investors note. “In that scenario, the Fed cutting its policy rate this year is unlikely.”
Vanguard’s model expects the Fed “won’t be in a position to cut rates until the middle of 2024,’’ according to the note.
What’s the inflation rate?
Consumer prices increased 4% in May, down from 4.9% the previous month, and a four-decade high of 9.1% last June, according to the CPI. That’s the smallest yearly rise since March 2021, and on a monthly basis, prices increased 0.1% following a 0.4% uptick in April.
Though price hikes overall have slowed, the Fed is more anxious about core inflation which stubbornly remains elevated.
Does the Fed plan to raise interest rates again?
While many expect a divided Fed to take a break Wednesday from its stream of rate hikes, economists are struggling to reach consensus on how it will move going forward as the economy remains resilient despite continuing inflation.
Before the release of a key inflation report Tuesday, some thought the central bank might roll out a quarter-point hike if the acceleration of prices was stronger than expected. Others said they believed rate hikes were done for the year.
Barclays predicted the Fed might increase rates again if more than 200,000 jobs were added to the economy last month, and core inflation rose by at least roughly 0.3%.
Employers blew past that hiring threshold, adding a stunning 339,000 jobs in May. And core prices, which don’t count volatile food and energy items and so better reflect longer-term trends, rose 0.4% for the third-straight month, according to the Labor Department’s consumer price index (CPI).
The jobless rate, however, which is calculated from a separate survey of households, bumped up from a five-decade low of 3.4% to 3.7%, according to the Labor Department, the highest it’s been since October. And the annual increase of core prices slipped from 5.5% to 5.3%, the lowest since November 2021.
If no rate hike, then what?:There may not be a Fed rate hike in June. But, Americans are still paying for the last 10
Overall, inflation slowed for an 11th straight month in May as grocery-price increases eased again and gas more than reversed the previous month’s rise. Consumer prices rose 4% , down from 4.9% in April and a four-decade high of 9.1% last June, according to the CPI. That’s the smallest yearly uptick since March 2021, and on a monthly basis, prices rose 0.1% following a 0.4% bump in April.
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