The Federal Reserve Just Took a Break. Is This the End of Interest Rate Hikes, or the Start of Another Surge?

Key takeaways

• The Federal Reserve passed on an opportunity to raise interest rates again at its June meeting.
• Inflation is coming down slowly, but the economy has stayed stronger than most experts expected. 

The Federal Reserve ended its June meeting by declining to raise interest rates, but strongly suggesting that it intends to resume rate hikes, with the possibility of two coming later this year. In fact, most members of the central bank now think rates will have to go even higher than they had anticipated.

The pause in interest rate hikes represents the first time the Fed has kept interest rates steady in more than a year.

The Fed is in a strange place. Inflation keeps lurching lower, which is exactly what the central bank wants when it raises interest rates. After all, when it costs more to get the same things, people are less likely to want them, which keeps their prices from rising too fast. 

But even as inflation is moderating, the economy remains strong – and on Wednesday, Fed members said they expect it to be stronger, and unemployment lower, than they had previously expected. That’s good news… right?

As we’ve explained in the past, it’s generally considered a very difficult task to slow the massive U.S. economy just enough to quell demand, but not enough to tip it into a downturn. In fact, it’s so difficult that economists usually blame the Fed for starting recessions. 

That outcome may still be in the cards. As the Fed explained on Wednesday, its members don’t think their job is done. All the numbers they now forecast for the future are higher than they’ve been thinking, for both economic growth and interest rates.

No-one knows whether inflation will keep cooling, or keep cooling fast enough, for the Fed’s taste. That makes it hard to assess whether more interest rate hikes are warranted and puts the central bank in a tough spot. They don’t want to be blamed for economic pain (like lost jobs), or for making it harder for Americans to finance homes, small businesses, and so on.

All this uncertainty makes things even harder for average Americans. Should we expect mortgage rates to stay the same? Go up? Dip lower? Should we feel safe in our jobs? Unfortunately, no one knows, least of all the Fed.