Fed delivers anticipated interest rate increase but no certainty over what's next

The Federal Reserve announced another 25 basis point interest rate hike on Wednesday following its June pause. 

The central bank has already raised rates 10 times in 2022 and 2023 to bring inflation down to its 2% target. Today's announcement will bring the federal funds rate to a targeted range of 5.25% to 5.5%, the highest level in 22 years.  

While the rate increase was largely anticipated because of Fed Chairman Jerome Powell's remarks over the past few months reiterating the Fed's commitment to bringing inflation to the 2% objective, the big question is if more increases will follow, according to Keeping Current Matters Chief Economist George Ratiu.

"The Fed's actions over the past year have had a similar cooling effect on inflation, with both the CPI and the PCE Price Index gliding down from around 9% to 3% territory," Ratiu said. "As FOMC members see the 2% target within sight—especially without significant damage to the economy up to this point—they clearly want to make another push to reach the milestone."

CoreLogic Chief Economist Selma Hepp said it is likely that the Fed will raise interest at least one more time before the end of this year. 

"The Federal Reserve will continue its aggressive rate stance for the remainder of the year," Hepp said in a statement. "The expectation is to see at least one more rate hike this year as the Fed will likely prefer to keep inflation low for two straight quarters to ensure the monetary policy is achieving its desired impact."

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The U.S. economy stands strong despite rising rates

The U.S. economy has been resilient in the face of rising interest rates. Real gross domestic product (GDP) increased at an annual rate of 2% in the first quarter of 2023, according to the third and final estimate released by the Bureau of Economic Analysis (BEA). 

Similarly, the unemployment rate for June remained at 3.6%, similar to levels registered when the Fed began raising rates in March 2022. Powell told reporters at a press conference that unemployment will likely rise to achieve the 2% target rate. 

Powell said that the challenge now, as inflation showed signs of easing, is to balance the risk of doing too little or too much. 

"As our stance becomes more restrictive and inflation moderates, that risk is bigger," Powell said. 

For now, it's a wait-and-see approach. The Fed's next meeting is in September. Powell said at the press conference that the Fed will continue to monitor key economic reports between now and then to determine if another rate increase is warranted or if rates will hold steady. 

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Consumers prepare to absorb higher borrowing costs

The Fed's decision to raise interest rates was largely anticipated and likely signals that it does not believe the economy has reached a point where it is comfortable backing off completely from its restrictive monetary policy, according to Michele Raneri, the vice president and head of U.S. research and consulting at TransUnion.  

A complete stop to interest rate hikes may come once the U.S. hits a protracted period of cooling inflation to ensure the monetary policy is achieving its desired impact, Raneri said. For consumers, the higher interest rates will mean having to absorb more expensive borrowing rates. 

While the Fed's interest rate decisions don't directly impact mortgages, they provide a floor beneath the cost of borrowing. Mortgage rates have remained in the 6% to 7% range since the beginning of the year and are unlikely to budge lower if interest rate hikes continue, according to Hepp.

"Mortgage rates will continue to be a headwind to the housing market for the foreseeable future," Hepp said. "Homebuilders will also be unlikely to meet housing demand. Both of these factors together will contribute to traditionally low home affordability for the rest of 2023."

However, with an end in sight for further rate hikes, buyers may delay a home purchase until interest rates stabilize and possibly reverse, according to Raneri. 

"It remains to be seen whether cooling inflation may help motivate consumers who had been holding off due to increasing cost of living expenses," Raneri said. 

Credit card interest rates are likely to remain high, as well. Consumers looking to open a credit card today may pay an average credit card interest rate of 24.52%, according to Forbes Advisor's weekly credit card rates report.

"Credit card interest rates will remain high, and those rates will likely tick up once again," Raneri said. "Consumers should continue to be diligent to the extent they are able when using cards whether planning any late summer travel, doing back-to-school shopping, or simply paying for household expenses. As always, consumers should consider their ability to make monthly payments."

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