The cost of borrowing will continue to rise as the Federal Reserve increased its benchmark rate for the 10th straight time on Wednesday.
The federal funds rate — which indirectly determines the cost of loans, mortgages, auto financing and credit cards — has increased by 25 basis points, and is now in a range of 5% to 5.25%.
Over the past year, Fed chair Jerome Powell has repeatedly said that continued rate hikes are necessary until inflation is under control. The year-over-year rate of inflation is currently 5%, still well above the Fed's target of 2%.
By raising interest rates, the central bank discourages spending and investment. This can reduce demand in the economy and slow down inflation, possibly resulting in a recession.
Since the rate hikes began in March 2022:
- Average interest rates for credit cards climbed from just over 16% to nearly 21%, according to Federal Reserve data.
- Average rates for 30-year fixed rate mortgages increased from 3.76% to 6.43%, per Freddie Mac data.
- Average interest rates for five years of auto financing for a new car increased from 3.98% to 6.58% in April 2023, according to Bankrate data.
- Average interest rates for personal loans climbed from 10.30% to 10.82%, according to Bankrate data.
Is this finally the end of interest rate hikes?
Wednesday's hike will likely be the Fed's last for 2023, according to its own projections. However, Powell has said that further tightening might be required if the rate of inflation remains high.
Fortunately for borrowers, the Fed predicts that it will make rate cuts in 2024, with its benchmark interest rate predicted to fall to about 4.3%.
However, traders in federal funds futures contracts assume the Fed will start cutting rates well before next year. Based on their predictions, there's a nearly 75% probability that the federal funds rate will be between 4% and 5% by September 2023, according to the CME's FedWatch tool.
"The Fed has created their own credibility crisis on inflation, with markets expecting the Fed to cave at the first sign of trouble economically and begin cutting rates," says Greg McBride, chief financial analyst at Bankrate.
"The Fed is saying the opposite, that they will see the job through in getting inflation under control. Ultimately, one of those will be proven right and one will be wrong."
For the Fed to reverse course and cut rates sooner than expected, it would likely require a rapid drop in inflation coupled with a sharp economic downturn, McBride says.
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