The Federal Reserve’s decisions on interest rates have a significant impact on the economy and your financial life. With inflation rising in 2022 and 2023, the Fed raised rates aggressively to cool economic growth and bring down high inflation. However, with inflation easing in late 2023 and early 2024, the Fed paused its rate hikes, leaving investors wondering if a rate cut could be coming soon.
Understanding the Fed’s Interest Rate Decisions
The Federal Reserve’s Federal Open Market Committee (FOMC) meets eight times per year to determine monetary policy, including whether to raise, lower or hold steady the target federal funds rate. This key interest rate impacts short-term borrowing costs throughout the economy.
When the FOMC believes the economy is overheating with high inflation, it will raise rates to slow growth. Conversely, when the economy is sluggish, the FOMC can stimulate growth by reducing rates.
After keeping rates near zero during the pandemic, the FOMC raised its benchmark rate 11 times from March 2022 to July 2023. This took the federal funds rate target from 0.25% up to a range of 5.25% to 5.50%.
However, with inflation cooling from its peak of 9.1% in June 2022 down to 6.5% by December 2022, the Fed has held rates steady at its last 4 meetings. This pause has led investors to anticipate a rate cut in 2023 as inflation moves back toward the Fed’s 2% target.
The Fed’s January 2023 Interest Rate Decision
At its January 31-February 1, 2023, meeting, the FOMC left its target federal funds rate unchanged in a range of 5.25% to 5.50%. This decision marked the 4th consecutive meeting the Fed held rates steady after its aggressive tightening cycle in 2022 and early 2023.
In its post-meeting statement, the FOMC said it will maintain the current target range “until it sees clear evidence inflation is on track toward its 2% goal.” This indicates rates could remain elevated for some time until inflation moves sustainably lower.
While investors cheered the Fed’s success in lowering inflation from its peak, the Fed left open the possibility of additional hikes if inflation rebounds. Markets are currently pricing in rate cuts beginning in late 2023 or early 2024.
READ ALSO: What’s the Average Personal Loan Interest Rate?
How Interest Rate Decisions Impact Savers
Higher interest rates set by the Federal Reserve provide savers with the opportunity to earn more interest income from deposit accounts. As the Fed raised rates in 2022, savings account and CD rates moved substantially higher after years of minimal returns.
- Savings accounts – Top yields now range from 4% to 5%, up from 0.06% before rate hikes began.
- CDs – 1-year and 5-year CD rates now top 5%, up from under 1% and 2%, respectively.
- Money market accounts – Yields now reach over 4% on some accounts, versus 0.44% in early 2022.
With the Fed now on hold, consumers should shop around for the best deposit rates, as some banks may lower yields in anticipation of future Fed rate cuts. Locking in CDs now can capture high fixed yields.
Impact on Mortgage Rates and Homebuyers
The Fed’s rate hikes led to a sharp rise in mortgage rates in 2022 and 2023 as lenders passed along higher borrowing costs. Rates on 30-year fixed mortgages reached 7% by late 2022, up from 3% before hikes began. This added hundreds of dollars to monthly payments for homebuyers.
With mortgage rates soaring along with home prices, housing affordability declined substantially. This contributed to slowing home sales, especially for first-time buyers facing high rates and inflated prices.
Now that the Fed is pausing rate hikes, mortgage rates have stabilized but remain elevated compared to 2020 and 2021. Sustained high rates continue to impact affordability but should lead to slower home price appreciation.
Effects on Credit Card Interest Rates
Since most credit cards have variable interest rates, the Fed’s rate hikes quickly translated to higher costs for revolving credit card debt. Average credit card APRs now exceed 20%, up from around 16% before hikes began.
For consumers carrying balances, minimum payments spiked as the Fed raised rates. With rates high but stable now, focus should be on paying down high-interest credit card balances or transferring to introductory 0% APR cards.
Other Consumer Loan Impacts
Rising rates approved by the FOMC also filtered through to other consumer lending markets over the past two years:
- Auto Loans – Increased borrowing costs led to higher average used car loan rates, which now top 7% versus under 4% in early 2021. New car loan rates also rose but remain under 5%.
- Personal Loans – Personal loan rates now average over 13%, compared to 9% before tightening started. Good credit can still yield rates under 10%.
- Student Loans – Most existing federal student loans have fixed rates, but new and private student loans feel the impact of higher rates.
With rates leveling off but still high, it’s wise to shop around for the most competitive interest rates when financing large purchases or consolidating debt. Consider holding off borrowing until rates move lower.
READ ALSO: Experts 2025 Mortgage Rate Predictions
Impact on the Economy
The FOMC raises interest rates to purposely slow economic activity and curb demand in order to bring down high inflation. The desired effect is a “soft landing,” where growth cools enough to lower inflation but not so much as to cause a recession.
In 2022 and early 2023, the desired effects emerged as GDP and spending moderated from strong pandemic levels while job gains continued. High rates also strengthened the U.S. dollar.
But rates may need to come down to sustain the expansion, especially in rate-sensitive sectors like housing. The Fed is aiming for a still-elusive “Goldilocks” economy that is neither too hot nor too cold.
Market Expectations for Future Rate Moves
Investor perceptions over where interest rates are headed play an important role in financial markets. As the Fed raised rates aggressively in 2022, investors feared an economic downturn.
But with inflation responding to tighter monetary policy, markets now expect the FOMC to begin cutting rates in 2023 to sustain growth. Many economists see 2-3 rate cuts this year as the most likely path.
Still, the Fed has stressed that rates need to remain restrictive until inflation gets much closer to its 2% target. If price pressures reignite, the FOMC could resume hiking.
The Bottom Line
The Federal Reserve’s decision in January 2023 to again leave its benchmark interest rate unchanged marks a notable shift in monetary policy after months of substantial rate hikes aimed at reducing high inflation.
While the Fed remains on alert and ready to further raise rates if needed, continued moderating inflation creates an opening for rate cuts later in 2023 to sustain economic growth. After significantly impacting consumer costs for mortgages, auto loans and credit over the past two years, interest rates appear to be reaching a peak but remain elevated by historical standards.
For now, the Fed is prepared to hold rates at restrictive levels until inflation dynamics align fully with its 2% target. This prolonged period of high interest rates warrants a watchful eye and proactive moves from consumers
FAQs: Federal Reserve Interest Rate Policy
What interest rate did the Federal Reserve raise most recently?
The Federal Reserve last raised its target federal funds rate in July 2023 by 0.75% to a range of 5.25% to 5.50%. This followed four straight 0.75% hikes from May to June 2023 as the Fed worked aggressively to control inflation.
How often does the Federal Reserve meet to decide interest rates?
The Federal Open Market Committee meets 8 times per year, roughly every 6 weeks, to review economic conditions and decide whether to adjust interest rate policy. In 2022, the FOMC increased the frequency of meetings to nearly monthly during periods of aggressive tightening.
How quickly does the Fed’s rate decision impact consumers?
When the Fed raises or lowers its target rate, effects filter through the economy over weeks and months. But rates that directly impact consumers, like credit cards and savings accounts, often respond very quickly to Fed rate moves. Fixed mortgage rates and auto loans adjust more slowly.
What interest rate does the Fed target?
The Federal Reserve directly controls the federal funds rate, which is the interest rate banks charge each other for short-term lending. This key rate influences many consumer interest costs, from credit cards to mortgages. The current target range set by the FOMC is 5.25% to 5.50%.
How accurate are market predictions for future Fed rate moves?
Fed interest rate futures contracts and economist surveys provide predictions on whether the FOMC will raise, lower or hold rates steady at upcoming meetings. These predictions tend to be more accurate when rate policy is stable. Around potential turning points, forecast uncertainty increases.
Does the Fed raise rates to fight inflation?
Yes, when inflation is as high as it was in 2022, the Federal Reserve will purposely raise interest rates to slow economic growth and dampen demand. This helps bring down price pressures. Once inflation moves back to the Fed’s 2% goal, it can reverse course and cut rates to boost the economy.
In another related article, Projected Interest Rates in 5 Years: Detailed Forecast and Analysis for 2025
