Federal Reserve chairman Jerome Powell and his colleagues voted to hold interest rates steady at a 23-year high on Wednesday. The central bank is trying to curb stubborn inflation. Justin Sullivan/Getty Images hide caption
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Justin Sullivan/Getty Images
Federal Reserve chairman Jerome Powell and his colleagues voted to hold interest rates steady at a 23-year high on Wednesday. The central bank is trying to curb stubborn inflation.
Justin Sullivan/Getty Images
The Federal Reserve voted to keep interest rates at a 23-year high on Wednesday, as the central bank tries to curb stubborn inflation. Investors now think it could be September at the earliest before borrowing costs start to come down.
"Inflation has eased over the past year but remains elevated," the Fed's rate-setting committee said in a statement. "In recent months, there has been a lack of further progress toward the Committee's 2% inflation objective."
Consumer prices in March were 2.7% higher than a year ago, according to the Commerce Department's inflation yardstick, which is closely watched by the Fed.
Fed chairman Jerome Powell said it's unlikely that the central bank will have to raise interest rates higher to bring inflation under control.
"My expectation is that we will, over the course of this year, see inflation move back down," Powell told reporters Wednesday. "My confidence in that is lower than it was."
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The central bank has kept its benchmark interest rate between 5.25 and 5.5% since July of last year. As recently as March, Fed policymakers thought they would be able to cut that rate by an average of .75 percentage points this year. Hopes for lower rates have dimmed, however, as progress on inflation appears to have stalled.
While the prices of many goods such as cars and furniture have fallen, the prices of services such as restaurant meals and car repair continue to climb. Higher interest rates may have less effect on demand for services, making it harder for the Fed to bring prices under control.
"You typically take out a loan for when you make a big goods purchase, like a car, certainly a house," says Ernie Tedeschi, director of economics at the Yale Budget Lab. "Services spending is generally less interest rate-sensitive."
A report from the Commerce Department last week showed that consumer spending is increasingly tilted towards services.
What's more, tens of millions of Americans are largely insulated from the Fed's rate hikes, because they locked in low, fixed-rate mortgages and don't carry a lot of credit card debt.
"That's one of the reasons why the consumer remains fairly willing to go out to restaurants and got to the mall," says Oren Klachkin, financial market economist at Nationwide. "They're not feeling that pain of the high-rate environment. Of course, that means that inflation is not going to come down as fast. But that's kind of the tradeoff that we're in right now."
Powell dismissed the idea floated by some Republicans that the current situation is a rerun of 1970s-era "stagflation," with slow growth and high inflation.
"I don't see the stag or the flation," Powell said.
FAQs
The US Federal Reserve has held interest rates at a 23-year high amid stubborn cost-of-living increases. The central bank on Wednesday kept the benchmark lending rate at 5.25-5.50 percent after a series of economic reports indicated that inflation was easing at a slower pace than hoped.
What is the highest the Fed has ever raised interest rates? ›
When he's not working, he's either reading a book, riding his bicycle or playing a board game with his kids (and sometimes with his wife). Key Takeaways: The highest the federal funds rate has ever soared was to 20% in December 1980. The lowest it has dropped is effectively 0% in 2008 and 2020.
What happens if the Fed keeps raising interest rates? ›
The Fed raises interest rates to slow the amount of money circulating through the economy and drive down aggregate demand. With higher interest rates, there will be lower demand for goods and services, and the prices for those goods and services should fall.
Why were interest rates so high in 2000? ›
NEW YORK (CNNfn) - The Federal Reserve Tuesday raised short-term interest rates by a half percentage point -- the first move of that magnitude in more than five years -- in an effort to slow the torrid pace of the U.S. economy and ensure prices for goods and services don't flare out of control.
Why was the Fed interest rate so high in 1980? ›
The fed funds rate has never been as high as it was in the 1980s. The main reason is because the Fed wanted to combat inflation, which soared in 1980 to its highest level on record: 14.6 percent.
What is the Fed rate highest in 22 years? ›
Federal Reserve holds interest rates at 22-year high, signals 3 cuts next year. The Federal Reserve maintained its benchmark interest rate on Wednesday in a range of 5.25%-5.50%, the highest in 22 years, but signaled it will likely cut interest rates by a total of 75 basis points, or 0.75%, in the year ahead.
What will the interest rates be in 2025? ›
The median estimate for the fed-funds rate target range at the end of 2025 moved to 3.75% to 4%, from 3.5% to 3.75% in December. For the end of 2026, the median dot now shows a target range of 3% to 3.25%, versus 2.75% to 3% three months ago.
Who benefits from high interest rates? ›
The financial sector generally experiences increased profitability during periods of high-interest rates. This is primarily because banks and financial institutions earn more from the spread between the interest they pay on deposits and the interest they charge on loans.
Why won't raising interest rates work? ›
Raising borrowing costs for consumers theoretically means they have less to spend on other goods and services. Just as importantly, it raises borrowing costs for businesses, reducing demand for investment and lowering profits. This lowers their ability to employ people or give inflation-busting pay rises.
What are the disadvantages of increasing interest rates? ›
Higher interest rates tend to negatively affect earnings and stock prices (often with the exception of the financial sector). Changes in the interest rate tend to impact the stock market quickly but often have a lagged effect on other key economic sectors such as mortgages and auto loans.
2021: The lowest 30-year mortgage rates ever
And it kept falling to a new record low of just 2.65% in January 2021. The average mortgage rate for that year was 2.96%.
How high will CD rates go in 2024? ›
CD Rates Forecast 2024
The CME FedWatch Tool, which measures market expectations for federal funds rate changes, shows that most experts expect rates to sit between 4.50% and 5.25% by December 2024.
What is the highest interest rate in history? ›
Interest rates reached their highest point in modern history in October 1981 when they peaked at 18.63%, according to the Freddie Mac data.
What stopped inflation in the 80s? ›
Inflation fell but was still high even as the economy recovered in the second half of 1980. But the Volcker Fed continued to press the fight against high inflation with a combination of higher interest rates and even slower reserve growth.
Why did the Feds keep raising interest rates? ›
By raising interest rates, the Federal Reserve wants to make borrowing more expensive. Rising interest rates typically encourage people to save more. Less money circulating in the economy means slower economic growth and less inflation.
Why isn't inflation going down? ›
Historical data suggests a key factor in bringing down prices is a slowdown in consumer spending. Despite nearly half of Americans reporting they're in a worse financial situation than five years ago, they're still spending.
What has been the highest interest rate in history? ›
Interest rates reached their highest point in modern history in October 1981 when they peaked at 18.63%, according to the Freddie Mac data.
Will CD rates go up in 2024? ›
"CD rates will most likely drop and drop substantially in 2024," says Robert Johnson, professor of finance at Heider College of Business at Creighton University. "The biggest reason is the likelihood of Federal Reserve rate cuts later this year."
What will the interest rates be in 2024? ›
Selected Interest Rates
| Instruments | 2024 May 22 | 2024 May 23 |
|---|
| 10-year | 2.10 | 2.17 |
| 20-year | 2.16 | 2.21 |
| 30-year | 2.21 | 2.26 |
| Inflation-indexed long-term average 11 | 2.23 | 2.28 |
34 more rowsAs recently as their last meeting on March 20, the officials had projected three rate reductions in 2024, likely starting in June. But given the persistence of elevated inflation, financial markets now expect just one rate cut this year, in November, according to futures prices tracked by CME FedWatch.
