The Federal Reserve is holding rates steady this month, ending the streak of 10 consecutive rate hikes that the Fed’s Federal Open Market Committee imposed for over a year to bring down inflation.
“Since early last year, the FOMC has significantly tightened the stance of monetary policy,” said Fed Chair Jerome Powell at a June 14 press conference. “We have covered a lot of ground, and the full effects of our tightening have yet to be felt.”
But this latest rate hike pause is uncharted territory. Though inflation has slowed, it still remains higher than the Fed’s 2% target goal, which means there’s still work to be done to reach the goal.
Most experts expected this move, however. “It’s understandable that the Fed would pause the rate increases this month, as there is a growing body of evidence that inflation is cooling in many areas. However, it is certainly not yet under control,” said John Blizzard, president and CEO of Seattle Bank. But more rate hikes are likely in store for 2023. “Though the Fed voted not to increase rates today, there is a consensus in the market that it still may do so in July,”
Below, we’ll unpack what this pause in rate hikes means, when rate hikes may resume, and how you can prepare for what’s next.
Is this the end of the Fed’s rate hikes?
The Fed’s decision to pause rate increases keeps the target federal funds rate at a range of 5.00% to 5.25%. Inflation is now at 4% year over year, according to the latest consumer price index report, significantly lower than June 2022’s record high of 9.1%. Slowly but surely, inflation has been inching downward.
But only time will tell whether the Fed will continue pausing rate hikes or simply skip this month and resume increasing in July. The Fed plans to evaluate different economic factors and determine what to do next. Some experts already predict that the pause will likely end this fall.
“I still think the Fed will resume some pace of hikes, maybe late third or early fourth quarter,” said Stuart Caplan, chief investment officer at Apex Financial Advisors, “The central bank noted in the release that it takes a while for their efforts to ripple through the system, and I like that it is giving some time here to see how things evolve over the summer.” If the Fed resumes rate hikes, we’ll see 25 basis point increases at best, Caplan predicts.
July’s inflation data, as well as unemployment numbers, will likely play a significant role in the Fed’s next move. And if inflation continues trending down, experts warn we’re not out of the woods yet. A recession — albeit likely a milder one — is still likely, which makes now a good time to build up an emergency fund in a high-yield savings account and pay down debt.
Pausing rates this month will give the Fed a three-month period to look at data to make a decision about where rates will go next, said Powell. But there’s still a chance for future rate hikes, since the committee expects the target federal funds rate to reach 5.6% by the end of the year.
“Looking ahead, nearly all committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2% over time,” said Powell.
With rates staying the same for now, but more rate increases probably ahead, here’s what you need to know to make smart financial decisions in the coming months.
Savings accounts will remain at an all-time high, experts say
Some banks have increased interest rates for high-yield savings accounts within the past week, ahead of the Fed’s news. And though the federal funds rate isn’t increasing in June, there’s a chance that banks could push rates higher to remain competitive for deposit accounts — but not by much.
It’s time to lock in a long-term CD
“From a consumer standpoint, even if the Fed stops raising rates, it remains a great moment for savers,” said Blizzard. For many banks, CD rates are the highest they’ve been in more than 15 years, he added.
