In The News is a series of posts meant to keep you updated on what’s going on in the financial world, and help you understand it!
This week, the Federal Reserve decided not to raise interest rates. It’s being called a “rate hike pause,” because the Fed also projected that it will raise interest rates two more times this year. This is being heralded as good news by many, because an increase in interest rates means that money becomes more expensive to borrow. When money is more expensive to borrow, fewer people and businesses do so — that slows the economy down.
So, with a rate hike pause, what exactly is happening? It’s a signal from the Fed that its plan is working. That, too, is a good sign.
The Fed’s plan, in context
As we’ve written about before, the biggest issue in the U.S. economy right now is inflation. Inflation is another word for “rising prices,” and as you’ve probably noticed, things have gotten a lot more expensive over the past couple of years. There are a lot of reasons for that, but at the core of it all is the pandemic.
Now, with prices rising, the Fed needed to find a way to slow things down. As such, it started raising interest rates to try and lower demand for goods and services — again, if it costs more to borrow, fewer people will do it, which means fewer people will probably buy houses, cars, etc. The Fed has been raising interest rates regularly dating back to the beginning of 2021, as inflation has remained high.
As for what’s changed to spur the “hike pause?” In short, the plan appears to be working. The latest inflation report — which is called the Consumer Price Index, or CPI — shows that as of May, year-over-year inflation is 4%. That’s down from a peak of around 9% during the summer of 2022. So, yes, we’ve made some serious headway in slowing down the rate of inflation.
That’s what’s likely behind the pause: The plan is working.
Another question: If the plan is working, why plan on two more rate increases this year? The answer is that the Fed isn’t quite done yet. The Fed actually plans for a little bit of inflation on an annual basis — its target is 2%. So, with 4% inflation, we’re still seeing prices increase at double the rate the Fed wants. As a result, it’s going to keep turning the screws, so to speak, on consumers.
As for a takeaway? We’re seeing the results we want to see, which is by and large, a good thing. There’s a chance that the Fed could raise rates too much, and send the economy into recession — in fact, many people were expecting that to happen. So far, though, it hasn’t, which is also good.
The rate hike pause is a signal that we’re trending in the right direction, but not out of the woods yet. We’ll know more next month after we get June’s jobs report, CPI report, and the next Fed meeting.
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