Fed Squeezes Inflation and Economy Harder With a Tenth—Possibly Final—Rate Hike

The Federal Reserve once again increased the pressure pushing down on inflation—and the economy—for what could be the final rate hike of its current campaign. 

The central bank raised its benchmark interest rate for the tenth time in this cycle by a quarter-point to a range of 5% to 5.25% Wednesday. The widely expected move pushed rates to a fresh high since 2007.

The Fed's policy committee said its next actions would be guided by data on inflation and the health of the economy, leaving open the possibility it could hold the rate flat when it next meets in June.  

“In determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” the central bank said in a prepared statement.

Central bankers removed language they had used in the previous statement about attaining "sufficiently restrictive" monetary policy in future rate increases.

High interest rates have had the intended effect, increasing borrowing costs for all kinds of debt (including consumer credit like credit cards and car loans) and discouraging borrowing and spending, especially for things typically bought on credit such as houses.

Federal Reserve Chair Jerome Powell noted the interest rate hikes combined with banks' growing reluctance to lend money is pushing down inflation and slowing the economy. That could set the stage for a possible pause in rate hikes.

"In light of these uncertain headwinds, along with monetary policy restraint we've put in place, our future policy actions will depend on how events unfold," Powell said at a press conference.

He did not rule out future rate hikes, saying the bank was “prepared to do more if greater monetary policy restraint is warranted.”

Stocks fell during Powell's press conference after he said he expected inflation to fall slowly and the Fed would have to have to keep rates high for some time.

The Fed has been steadily raising rates since March 2022 under the theory that a downturn in spending will give supply and demand a chance to rebalance from a pandemic-related surge in the cost of living. The year-over-year rise of the consumer price index has cooled down from its peak of 9.1% in June 2022 to 5% in March, closer to the Fed’s 2% goal—and the economy has felt a chill as well. 

Economic growth as measured by gross domestic product (GDP) has sputtered under the weight of the rate hikes. The formerly plentiful job market has also started to falter as employers have pulled back on open positions. 

Further rate hikes intended to fully vanquish high inflation could tip the economy into a recession, helped along by banks curtailing lending in response to the ongoing turmoil in the financial system, economists said.

Economic forecaster Robert Fry, formerly the chief economist at DuPont, said the Fed has likely pushed its interest rate as high as it will go, and its next rate move will be downward.

"I think they intend to keep them here for a long while, but I think once it's clear to everyone that we're in a recession, I think the pressure on them to cut rates becomes too much for them to resist," Fry said.

For consumers, the latest rate hike makes borrowing for certain kinds of loans still costlier and saving more appealing. While average interest rates offered for savings accounts and certificates of deposit have lagged behind the Fed’s increases, some banks have been offering higher rates. Savvy savers can get a good deal by shopping around. 

For rates on things like mortgages, the biggest impact will come from how the economy responds to the rate hike, said Tom Graff, head of investments at Facet. 

Long-term interest rates could rise further if the economy avoids a recession, but could fall in the case of an economic downturn in the coming months, which could cause the central bank to reverse course and start cutting rates.

“It's less about what the Fed does today, so much as, how does what the Fed does today influence where the economy is going to be in 3, 6, 12 months?” Graff said.