According to economists, borrowing costs for Americans are set to increase in the near future.
The Federal Reserve is anticipated to raise its benchmark interest rate on Wednesday for the first time in over three years, as it confronts persistent inflation driven by elevated energy prices. Several analysts on Wall Street also forecast one or two additional rate hikes in the upcoming months.
Despite former President Trump’s ongoing calls for reduced interest rates, many economists believe that Federal Reserve officials will increase the federal funds rate by 0.25 percentage points during their meeting on September 16. Inflation continues to exceed the central bank’s annual target of 2%, with the Consumer Price Index reflecting a 3.4% increase year-over-year in August.
Interest rate increases are the Federal Reserve’s primary mechanism for combating inflation, as they typically lead businesses and consumers to reduce their spending. This, in turn, cools the economy and mitigates price increases as demand declines.
Given the lack of significant progress in resolving the conflict in Iran, some economists anticipate that high energy prices may persist for an extended period, potentially prompting the Fed to adopt a more stringent monetary policy to curb inflation.
Brandon Zureick, chief economist at Johnson Investment Counsel, remarked to CBS News, “If the current situation remains unchanged, with energy prices high and the economy robust, it’s reasonable to expect one or two more hikes beyond this week. However, we do not foresee a repeat of 2022, when the Fed was addressing inflation rates that were significantly higher.”
In June 2022, inflation surged to a 40-year high of 9.1%, leading the Fed to implement a series of 11 rate hikes that escalated its benchmark rate from nearly zero to a range of 5.25% to 5.5% by July 2023. This was the last instance of the central bank increasing borrowing costs, after which it either held rates steady or reduced them.
The Federal Reserve will unveil its decision at 2 p.m. ET on September 16, followed by a press conference featuring Fed Chairman Kevin Warsh at 2:30 p.m.
The Federal Open Market Committee, responsible for setting rates, will also provide its quarterly Summary of Economic Projections on Wednesday. This report will detail the FOMC officials’ forecasts regarding inflation, GDP growth, and other economic indicators.
CME FedWatch, which predicts the likelihood of interest rate changes based on 30-day Fed funds futures prices, estimates a 90% chance of a 0.25 percentage-point rate hike on Wednesday. This move would elevate the federal funds rate, which represents what banks charge each other for short-term loans, to a target range of 3.75% to 4%.
The more pressing question is whether an increase this week marks the start of a series of hikes, as some economists suggest, considering the inflationary pressures stemming from the Iran conflict. Diesel prices reached a record high of $6.27 per gallon on Tuesday, while gasoline prices surged by 18 cents within the past week, hitting $4.33 per gallon, according to AAA.
Seema Shah, chief global strategist at Principal Asset Management, commented in an email, “The discussion has shifted from ‘if’ to ‘how much’ tightening will be necessary this cycle to restore price stability. After five years of inflation above the target, ongoing trade disruptions, oil prices exceeding $100 per barrel, and increasing inflationary pressures from the AI capital expenditure buildout, a one-time rate hike approach seems unlikely.”
There remains a possibility that the conflict in Iran could be resolved quickly, which would alleviate energy prices and potentially preclude additional rate hikes, Zureick noted. This uncertainty complicates the prediction of inflation trends and the Fed’s subsequent actions.
As a result of these changes, banks are expected to increase interest rates on credit cards and other lending products. However, a single 0.25 percentage-point hike may not significantly elevate borrowing costs.
Matt Schulz, chief consumer finance analyst at LendingTree, advised CBS News that “cardholders should anticipate their credit card’s APR to rise by a quarter-point in the coming months following the Fed’s decision. Unfortunately, this increase will affect both existing balances and future purchases.”
According to Schulz, a rate hike this week could lead to only “a dollar or two” added to the monthly payments for those with outstanding credit card balances. Nevertheless, he cautioned that “for individuals already facing credit card debt, any increase is unwelcome.”
Conversely, a rate increase might help stabilize long-term interest rates associated with mortgages, as these rates typically track the yields of the 10-year Treasury bill, which have surged recently amid doubts regarding the Fed’s commitment to reducing inflation. When inflation rates are high, investors generally seek higher yields for longer-term bonds.
While rising interest rates tend to elevate borrowing costs, they also provide better returns for savers.
Schulz remarked, “This translates to improved returns on high-yield savings accounts and certificates of deposit (CDs). While returns may not match the record levels of previous years, they remain strong compared to historical standards, and a rate hike indicates they will continue to improve soon.”
Changes in Fed rates can lead to fluctuations in financial markets. For instance, the S&P 500 experienced an 18% decline when the Fed began raising interest rates in 2022 as the economy rebounded from the pandemic.
However, Zureick pointed out that investors were taken by surprise by the Fed’s aggressive measures at that time, while the current market has already incorporated expectations of a series of hikes.
He concluded, “It would require something significantly more drastic than what the market anticipates, which we currently deem unlikely.”
Zureick advised investors to maintain a diverse portfolio to navigate various economic challenges, suggesting, “A well-diversified portfolio that includes international stocks and small to mid-cap stocks is essential.”
