Fed official: rates may have peaked

Today’s high interest rates on all kinds of loans may be causing financial pressure for you, but relief may be on the way.

Takeaways

• The Federal Reserve may have raised its benchmark interest rate to as high as it will get, a central bank official said. 
• Price growth has slowed significantly since the Fed began its campaign of anti-inflation rate hikes in March 2022. 
• Setbacks in the inflation fight could make the Fed resume hiking again.
• Even with no more hikes, the Fed will likely keep interest rates high for months to come, hurting borrowers and helping savers.

According to prepared remarks, Patrick Harker, president of the Federal Reserve Bank of Philadelphia and member of the central bank’s policy committee, said in a speech in Philadelphia Tuesday that the Federal Reserve may have raised rates for the last time in its nearly year-and-a-half old fight against inflation.

“Absent any alarming new data between now and mid-September, I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work,” Said Harker

Keeping the Fed’s benchmark fed funds rate steady in September and at subsequent meetings would mark a significant shift in monetary policy. The central bank has raised its key interest rate 11 times since March 2022.

A rate hike has raised interest rates on credit cards, mortgages, and car loans. By raising borrowing costs, the Fed hopes to discourage spending and rebalance supply and demand.

Harker said he has been encouraged by the progress against inflation. Consumer goods and services prices have cooled to a 3% pace from the previous year as of June after spiking after the economy reopened from the pandemic, peaking at more than 9% in June 2022.

Interestingly, the inflation slowdown has occurred without the surge in unemployment that has been associated with past anti-inflation rate hikes dating back to the 1970s. The resilient labor market has raised hopes that the economy can achieve a “soft landing,” instead of the economic crash many economists were expecting to happen as a result of the Fed’s rate hikes.

“I do see us on the flight path to the soft landing we all hope for and that has proved quite elusive in the past,” said Harker.

If inflation doesn’t cooperate with the Fed’s soft landing goal, future rate hikes are possible.

CME Group’s FedWatch tool, which forecasts rate hikes based on fed futures trading data, shows that traders mostly agree with Harker. There was only a 14% chance of a rate hike in September and a 30% chance in November.

Even if it stops raising rates, the rate is currently at its highest since 2001, a level that Fed officials have said is “restrictive” of economic activity, and could stay there well into next year.