Interest Rates Just Hit the Highest in 22 Years. Now What?

Key takeaways:

• The Federal Reserve raised interest rates again, but refused to speculate on what it might do in the future.

• In spite of the rate hikes so far, the economy has remained stronger than most experts expected.

The Federal Reserve hiked interest rates again at its late-July meeting, after pausing in June. With rates
now at their highest in more than two decades, the Fed says anything goes when they meet in the
future. Besides the obvious – it’s more expensive to borrow money – what does this all mean for
consumers?

Your guess is as good as anyone’s, but there is good reason to be a bit wary. As we’ve mentioned in the past, the central bank raises interest rates because it wants to slow the pace of economic growth.

That’s a fine goal, especially when inflation is running extremely hot, which is a sign the economy is overheating. It’s just very, very hard to be precise when you’re doing something as difficult as slowing the world’s biggest economy. Economic contractions almost always happen because the Fed has been too aggressive. 

Earlier in 2023, we told you that central bank-watchers expected the Fed would reach that point sometime midyear. In fact, many experts believed that rates would soon start falling because the Fed would tighten the screws so much that a downturn would happen quickly (a “hard landing” in economics talk). 

So much for the experts!

The broader idea is still valid, though. It takes a long time for inflation to cool down and for the economy to settle, and the Fed risks being too aggressive with its rate hikes while it’s waiting for signs that these things have happened.