- The central bank raised interest rates in early February, but in a much smaller increment than at any time in 2022.
- There are not likely to be many more rate hikes, if any at all, over the coming months.
- Questions remain about how healthy the economy is in the wake of the rate hikes that were already put into place.
When the Federal Reserve (Fed) concluded its first meeting of 2023 on Feb. 1, it also announced another interest rate increase — the eighth since early 2022.
You’re probably aware that finance professionals, as well as many ordinary Americans, don’t like rate hikes. Higher borrowing costs make things more expensive, which is why people trying to qualify for a mortgage or a car loan get sticker shock.
Still, many investors cheered the January Fed decision. In large part, that’s because it was much smaller than most of the rate hikes in 2022: 25 basis points (0.25%) instead of 50 or 75. And that’s a signal that the Fed is gradually tapping the brakes on its rate-rise regime.
What’s less certain is how much damage has been done so far.
Fed policymakers don’t set out to harm the economy, but by definition, they are tasked with slowing it down when it overheats. When home sellers get offers that are hundreds of thousands of dollars over their asking prices, and business owners must hike wages well beyond what’s in their budget just to attract workers, it’s a sign that demand in the economy is running too hot.
Dampening that demand is relatively easy. As noted above, higher borrowing costs make people think twice about getting mortgages, small-business loans or car financing. Those are obvious linkages. In the massive American economy, though, there are countless indirect side effects that may come from higher rates. Thousands of people working in the mortgage business have lost their jobs over the past year, as just one example.
Economists and other experts often refer to the Fed’s goal as bringing the economy in for a “soft landing.” But as anyone who feels the side effects can attest, it usually feels pretty bumpy.
It’s also agonizingly slow. Consider a business that didn’t make as much money as it expected in one quarter. Its managers may not decide to make cuts in its workforce for several months. That means the next few weeks and months will be a waiting game to see just how soft the Fed’s landing actually was.
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