“We might do another unusually large rate increase,” Mr. Powell said on Wednesday. “But that is not a decision we have made at all.”
What the Fed’s Rate Increases Mean for You
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A toll on borrowers. The Federal Reserve has been raising the federal funds rate, its key interest rate, as it tries to rein in inflation. By raising the rate, which is what banks charge one another for overnight loans, the Fed sets off a ripple effect. Whether directly or indirectly, a number of borrowing costs for consumers go up.
Consumer loans. Changes in credit card rates will closely track the Fed’s moves, so consumers can expect to pay more on any revolving debt. Car loan rates are expected to rise, too. Private student loan borrowers should also expect to pay more.
Mortgages. Mortgage rates don’t move in lock step with the federal funds rate, but track the yield on the 10-year Treasury bond, which is influenced by inflation and how investors expect the Fed to react to rising prices. Rates on 30-year fixed-rate mortgages have climbed above 5 percent this year, according to Freddie Mac, up from closer to 3 percent for most of 2021.
Banks. An increase in the Fed benchmark rate often means banks will pay more interest on deposits. Larger banks are less likely to pay consumers more, and online banks have already started raising some of their rates.
Mr. Powell said the likely path of interest rates that the Fed outlined earlier this year — in which rates rise to about 3.5 percent this year — remains reasonable. The Fed will likely lift borrowing costs to “at least a moderately restrictive level,” at which they are more actively weighing down the economy, he said.
But the mere recognition that growth is cracking and that rate increases will eventually slacken was enough to appease investors. The SP 500 stock index ended the day up 2.6 percent, and the Nasdaq Composite posted its best day since April 2020. Markets can quickly change their tune, though. The last two times the Fed has raised rates, the SP 500 has rallied on the day of the announcement, only to fall the day after.
“At some point it will be appropriate to slow down,” Mr. Powell said. “We are going to be guided by the data.”
For now, the data — at least when it comes to inflation — remain worrying.
Consumer prices climbed by 9.1 percent in the year through June, with costs picking up quickly across an array of goods and services, from food and fuel to rent and dry cleaning.
The Fed will receive a new reading of its preferred inflation measure, the Personal Consumption Expenditures index, on Friday. That report is likely to confirm the signal sent by the more timely Consumer Price Index: Inflation was extremely rapid in June, rising at the fastest pace in decades.
Article source: https://www.nytimes.com/2022/07/27/business/economy/fed-interest-rate-inflation.html
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