Federal Reserve keeps up inflation fight, raises rates
Susan Tompor, Detroit Free Press
Updated 11 min read
Now that the Fed has raised interest rates yet again we can only wonder: What's next? Will inflation prove more stubborn and lead the Fed to raise rates even more? And, even more important perhaps, just how long will high interest rates stick around?
On Wednesday, the Federal Reserve raised short term interest rates by a quarter of a percentage point. The federal funds rate — which directly influences a variety of rates including those on credit cards, private student loans, small business loans and home equity lines of credit — now finds itself in a target range of 5.25% to 5.5%.
The federal funds rate now sits at the highest level in 22 years.
While some analysts speculate that this might be the Fed’s last rate hike in its aggressive attack on inflation, nothing seems certain. The Fed clearly left the door open to future rate hikes, indicating that the Fed “remains highly attentive to inflation risks” and “strongly committed to returning inflation to its 2% objective.”
Then again, Fed Chair Jerome Powell indicated that it remains possible that the Fed will pause, as it did in June, and will hold rates steady at the next meeting in September.
In September, Powell said, the Fed policy committee will be taking into account two new jobs reports and two additional monthly reports on the level of inflation. Based on how that data looks, he said, it's possible that the Fed could raise rates in September but it's also possible the Fed would hold rates steady then.
Powell indicated in comments at a news conference that the Fed has a long way to go to hit its 2% inflation goal. The Fed will review economic data, he said, and decide "meeting by meeting" whether to raise rates or hold steady in the future.
Powell stressed that the worst outcome would be to not deal with inflation now, "not get it done."
Most economists and other market watchers do not expect the Fed to start cutting rates anytime soon — which Powell agreed with Wednesday.
The economy has been surprisingly resilient. One member of the media at the newss conference even noted the robust spending surrounding this summer's Taylor Swift concerts. The Federal Reserve Bank of Philadelphia earlier pointed out that May was Philadelphia's strongest month for hotel revenue since the pandemic, largely due to fans who booked hotel rooms there during Swift's Eras Tour. The comment was in the central bank's Beige Book, which details how parts of the economy are doing in cities across the country.
"It seems like the economy is weathering this well," Powell said at the news briefing Wednesday.
Economic activity has been expanding at a “moderate pace,” according to the Fed’s July statement. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.”
Consumers and businesses are likely to experience tighter credit conditions, which the Fed said could “weigh on economic activity, hiring, and inflation.”
The Fed first initiated its round of rate hikes to combat inflation with a quarter point hike back in March 2022, driving the federal funds rate from a pandemic-stimulus low of nearly 0% to a range between 0.25% to 0.5%. The backdrop then included a spike in oil prices after Russia's invasion of Ukraine, as well as high prices for cars and other goods due to high demand but low inventories and supply.
The Fed paused and did not raise rates at its June meeting after raising rates by a quarter of a percentage point on May 3.
Interest rates aren't likely to tumble soon
After 11 rate hikes now, the Fed could very well sit tight through early 2024, according to Comerica Bank's chief economist Bill Adams.
Consumers, though, need to brace themselves for the possibility that interest rates could stay high for the rest of the year into early 2024.
The Fed had some room to raise rates, as the economy surprised many by avoiding a recession so far in 2023. Economic growth did slow down, though.
If inflation and the U.S. economy continue to cool, as seems likely, Adams said, the Fed would begin cutting short-term interest rates at the Fed's policy meeting March 19 and March 20 next year.
The economy is likely to "operate in low gear in the second half of this year and in early 2024," Adams said.
FILE-- The U.S. Federal Reserve Building is seen in Washington, DC, May 3, 2023. Some members of the US Federal Reserve's rate-setting committee supported another interest rate hike in June to tackle high inflation, but ultimately voted for a pause, the Fed announced July 5, 2023. (Photo by SAUL LOEB / AFP) (Photo by SAUL LOEB/AFP via Getty Images)
The string of good news includes incomes outpacing inflation since gas prices peaked last June, a boost in consumer confidence and solid job growth in some areas.
"High interest rates will hold back activity in the parts of the economy that depend the most on credit — housing, car sales, commercial real estate development — but hiring by employers who are still facing labor shortages like K-12 schools, day cares, and nursing homes could offset job losses in other sectors and keep the unemployment rate relatively low," Adams said.
Rates are indeed high, much higher than they were in early 2022.
The average 30-year fixed-rate mortgage is now 6.88%, up from 4.08% as of Feb. 28, 2022, according to Bankrate.com.
The average credit card rate has jumped to 20.44%, up from 16.34% in February 2022.
The average rate on a home equity line of credit — which homeowners have used to cover college tuition, remodel a kitchen or bathroom, go on vacation, consolidate higher-cost credit card debt — has shot up to 8.58% now, up from 4.59% in late February 2022, according to Bankrate.com.
What's happening with car loans?
Consumers, of course, are being hit by a double-whammy — the cost of borrowing has gone up as well as the price of many big ticket items, including cars and homes.
The 60-month new car loan on average is 7.24% now, not quite double the 3.99% average in February 2022, according to Bankrate.com. While the 48-month used car loan average is 7.79%, up from 4.59% in February 2022.
"While car loan rates are squeezing buyers to some extent, it’s really higher prices that are the bigger obstacle," said Ted Rossman, senior industry analyst for CreditCards.com and Bankrate.com.
Many people with lower incomes and lower credit scores have gotten "overextended by these high prices and hefty loan amounts — subprime auto delinquencies are worse now than during the Great Recession," Rossman said.
The average payment on a new car in June was $736 a month — that's up from $686 a year ago and $609 in June 2021, according to data from Edmunds.com. That's nearly a 21% increase in just two years.
The average amount financed has gone up by 9.4% from $36,914 in June 2021 to $40,385 last month.
Cash purchases or financing outside of the dealership, according to Edmunds.com, increased to 26% in the second quarter, compared with 23% in same quarter a year ago.
Dealer financed purchases fell to 52% in the second quarter, compared with 57% in the second quarter in 2022.
New car and truck sales remained strong overall in 2023, thanks to pent up consumer demand that had built up over the last few years, according to Jessica Caldwell, executive director of insights at Edmunds.
In addition, fleet operators, such as rental car companies, are finally getting new vehicles.
Caldwell said healthy car sales should carry on for the remainder of the year if we avoid any major disruptions to the supply chain or vehicle production, such as a possible strike in the auto industry.
Automakers, she said, are gradually offering more subsidized loan programs as inventory has improved and stabilized.
For consumers with strong credit, 0% to 3% car loan rates offered on some vehicles could take some of the sting out of rising interest rates overall. The caveat often is that the consumer could have to take on a three-year car loan for some of these deals instead of stringing out smaller payments for five years or more.
"All other shoppers will need to tread cautiously if they plan on financing a car purchase this year," Caldwell said.
Car loan rates might not move much higher following Wednesday's rate hike, given that the rate increase was expected by markets and already factored into rates being offered now.
For auto loans to go higher, Adams said, the Fed would need to change current expectations regarding the rate path in 2023 and 2024.
Auto loan rates could go up in August, Adams said, if the Fed signals more certainty about plans for further rate hikes in the near term, or talks down expectations for rate cuts beginning in 2024.
Autos are shifting away from being overwhelmingly a seller's market, he said, to one where supply and demand are more balanced.
"Production continues to ramp up, while high loan rates are restraining demand, which is causing car dealers to bring back incentives and compete on price," Adams said.
Will spike in gas prices influence the Fed?
The odds appear to be good that we're looking at the last rate hike for this round, according to Rossman and others.
Risks remain, though, when it comes to the Fed's inflation fight.
Gasoline prices have shot up in the last two days and could drive up inflation numbers in August, according to Omair Sharif, founder and president of Inflation Insights in Pasadena, California. The latest spike, he noted, is one of the largest two-day moves in daily AAA data going back to September 2005.
Sharif maintains that any trend toward higher gas prices could drive up the consumer price index for August, which will be released Sept. 13. Fed officials are likely to be more focused on core inflation — excluding gas and food — but the rise in gasoline prices isn't helpful because it could drive the Fed to be more cautious about rising inflation expectations, Sharif noted in a report Tuesday.
Michigan's average started the week at $3.47 a gallon but jumped to an average of $3.58 a gallon by Tuesday, according to Patrick De Haan, head of petroleum analysis at GasBuddy.
Most stations in Michigan raised their prices to about $3.69 a gallon.
De Haan expects the average to rise another 5 cents to 10 cents a gallon by the end of the week before starting to potentially trail off slightly. Michigan saw a similar spike a couple of weeks ago.
De Haan said higher gas prices can be blamed on various heat-related refinery snags. In addition, he noted that the price of oil is at its highest since April.
On Monday, AAA-The Auto Club Group reported that Michigan drivers are paying an average of $52 for a full 15-gallon tank of gasoline — a savings of about $26 a fill up from last year's highest price last June.
Adrienne Woodland, spokesperson, AAA-The Auto Club Group, said gas prices remain lower than they were a year ago.
Michigan's average climbed by more than 6 cents a gallon from Tuesday to Wednesday morning, according to data reported at the AAA website.
The average gas price in Michigan was $3.638 a gallon for regular gasoline Wednesday morning, according to AAA. Even so, that's still down 74.5 cents a gallon from an average of $4.383 a gallon the same time a year ago.
Woodland said higher crude oil prices — and heavy demand by those traveling this summer — have contributed to higher prices at the pump in late July. The highest recorded average price, according to AAA data, was $5.223 a gallon for regular unleaded gas on June 11, 2022.
Credit card squeeze hits consumers
While consumers might be saving money at the pump, many face serious financial challenges ahead if they're carrying credit card debt that became far more costly in the past year.
Even the Fed doesn't raise rates again in the coming months, Rossman advises consumers to prepare for a “higher for longer” scenario.
Someone who is carrying a balance on a credit card that has a rate of 20% — or even 30% on some cards offered at retail stores — needs a strategy to pay down that debt.
Most credit cards have variable rates, often pegged to the fluctuations in the prime rate, which rises when the Fed boosts the short-term federal funds rate. Consumers cannot bank on credit card rates simply falling back quickly on their own in the next several months.
For some, Rossman said, it could make sense to review a 0% balance transfer offer but consumers should work out a game plan to pay off that debt while the 0% rate remains in place. On some cards, the 0% promotion runs a year or so; others up to 21 months.
