Evelyn Reynolds

Federal Reserve Chairman Jerome Powell insisted Wednesday that the central bank is not deliberately trying to cause a recession and that the economy is on solid footing.
“With all due respect to that comment, it’s just not consistent with the data on the ground,” said RBC economist Tom Porcelli.
In the aftermath of Wednesday’s decision to raise benchmark interest rates 75 basis points, Wall Street reaction coalesced around a few common themes.

Federal Reserve Chairman Jerome Powell’s insistence that the central bank is not deliberately trying to cause a recession and that the economy is on solid footing is exactly what someone in his position would be expected to say.
The trouble is, the Fed’s likely to get a recession anyway as data shows the economy is a far cry from stable.

Consequently, markets whipsawed Thursday, going from a positive reaction on Wednesday to Powell’s post-meeting comments to a rout as worries fester over what effect higher interest rates and tighter monetary policy will have on a fragile state of affairs.
“What the market is worried about, even before you get to a recession, is a policy mistake, that the Fed breaks something,” said Quincy Krosby, chief equity strategist at LPL Financial. “The market also is questioning his comment that the economy is strong.”

Federal Reserve Board Chairman Jerome Powell speaks to reporters after the Federal Reserve raised its target interest rate by three-quarters of a percentage point to stem a disruptive surge in inflation, during a news conference following a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, U.S., June 15, 2022.
Elizabeth Frantz | Reuters

More specifically, two comments the Fed chair made stand out from the news conference: First, that the Fed is not trying to “induce a recession now. Let’s be clear about that.” Also: “There’s no sign of a broader slowdown that I can see in the economy.”
In fact, there are myriad signs of a slowdown.
On Thursday alone, real estate data for May showed a 14.4% monthly slowdown in housing starts at a time when there is a chronic shortage of homes. A Fed manufacturing reading showed continued contraction in the Philadelphia region. Weekly jobless claims were higher than expected as well.

That data piles onto other recent points: Inflation at 41-year highs, consumer confidence at historic lows, and retail spending falling amid dramatically higher prices.
“At minimum, growth was going to slow even before the Fed started pressing on the brakes,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets. “The evidence on that is seemingly growing on a pretty consistent basis now … With all due respect to [Powell’s] comment, it’s just not consistent with the data on the ground.”

The problem with the solution

In the aftermath of Wednesday’s decision to raise benchmark interest rates 75 basis points, the biggest move in 28 years, Wall Street reaction to the hike, plus Powell’s comments, coalesced around a few common themes.
First, as Krosby said, “The market believes the Fed is going to expunge inflation pressures.”
However, “That’s the problem now. There’s a sense in the market that he could lead us straight towards the Fed breaking something, which is a policy error,” she added.
Second, there was a general lack of clarity about what happens next. Will the Fed hike 50 basis points or 75 basis points come July? Statements from Powell indicated that both are on the table, but his seemingly glass-half-full comments about the economy left more wiggle room than markets were comfortable with.
Finally, the chair contradicted himself on multiple occasions.
He noted that the Fed has little control of inflation inputs such as energy and food prices, but said the Fed will keep hiking until gas prices fall. He also said inflation expectations are well-anchored while conceding that the policy pivot away from a half percentage point hike to Wednesday’s move was influenced by a rising inflation outlook, as shown in Friday’s University of Michigan survey.
And then there was the economic question, with the chair insisting the economy is well positioned to handle higher rates while an Atlanta Fed gauge is showing flat economic growth in the second quarter after falling 1.5% in the first.

A ‘confused’ Fed chief

Taken together, Powell’s comments “came across as confused, lacking confidence, and raising macroeconomic and financial stability risks,” Bespoke Investment Group said in a client note.
The firm also took Powell to task for emphasizing food and fuel inflation, which are generally considered outside the Fed’s purview.
“Not only is the Fed targeting the wrong variable explicitly and casting aside forward guidance, they also appear to be far too optimistic about near-term growth; Powell’s description of consumer spending as ‘strong’ amidst ‘no sign of a broader slowdown in the economy’ adds to our concern that the Fed is behind the curve and hurtling towards a policy error as a result,” Bespoke said.
Powell affirmed that he and his fellow policymakers won’t be locked into a specific course of action but will be guided by data.
He might not like what he sees for a while, particularly if he focuses on headline inflation influences such as gas and groceries.
RBC’s Porcelli said those numbers likely will point to 9% annual increases for the rest of the summer, putting the Fed in a potential box if it uses those levels as policy triggers.
“They need an off ramp. They need to acknowledge the reality that they can’t control this stuff,” Porcelli said. “They need to have a better narrative. Short of him laying out a more cohesive strategy for how they’re going to deal with this, this lends itself to an idea that maybe they do make a more meaningful policy mistake.”

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The Federal Reserve raised its benchmark interest rates three-quarters of a percentage point in its most aggressive hike since 1994.
According to the “dot plot” of individual members’ expectations, the Fed’s benchmark rate will end the year at 3.4%, an upward revision of 1.5 percentage points from the March estimate.
Officials also significantly cut their outlook for 2022 economic growth, now anticipating just a 1.7% gain in GDP, down from 2.8% from March.

The Federal Reserve on Wednesday launched its biggest broadside yet against inflation, raising benchmark interest rates three-quarters of a percentage point in a move that equates to the most aggressive hike since 1994.
Ending weeks of speculation, the rate-setting Federal Open Market Committee took the level of its benchmark funds rate to a range of 1.5%-1.75%, the highest since just before the Covid pandemic began in March 2020.

Stocks were volatile after the decision but turned higher as Fed Chairman Jerome Powell spoke in his post-meeting news conference.
“Clearly, today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common,” Powell said. He added, though, that he expects the July meeting to see an increase of 50 or 75 basis points. He said decisions will be made “meeting by meeting” and the Fed will “continue to communicate our intentions as clearly as we can.”

“We want to see progress. Inflation can’t go down until it flattens out,” Powell said. “If we don’t see progress … that could cause us to react. Soon enough, we will be seeing some progress.”
FOMC members indicated a much stronger path of rate increases ahead to arrest inflation moving at its fastest pace going back to December 1981, according to one commonly cited measure.
The Fed’s benchmark rate will end the year at 3.4%, according to the midpoint of the target range of individual members’ expectations. That reflects an upward revision of 1.5 percentage points from the March estimate. The committee then sees the rate rising to 3.8% in 2023, a full percentage point higher than what was expected in March.

2022 growth outlook cut

Officials also significantly cut their outlook for 2022 economic growth, now anticipating just a 1.7% gain in GDP, down from 2.8% from March.
The inflation projection as gauged by personal consumption expenditures also rose to 5.2% this year from 4.3%, though core inflation, which excludes rapidly rising food and energy costs, is indicated at 4.3%, up just 0.2 percentage point from the previous projection. Core PCE inflation ran at 4.9% in April, so the projections Wednesday anticipate an easing of price pressures in coming months.
The committee’s statement painted a largely optimistic picture of the economy even with higher inflation.

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“Overall economic activity appears to have picked up after edging down in the first quarter,” the statement said. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”
Indeed, the estimates as expressed through the committee’s summary of economic projections see inflation moving sharply lower in 2023, down to 2.6% headline and 2.7% core, expectations little changed from March.
Longer term, the committee’s outlook for policy largely matches market projections which see a series of increases ahead that would take the funds rate to about 3.8%, its highest level since late 2007.
The statement was approved by all FOMC members except for Kansas City Fed President Esther George, who preferred a smaller half-point increase.
Banks use the rate as a benchmark for what they charge each other for short-term borrowing. However, it feeds directly through to a multitude of consumer debt products, such as adjustable-rate mortgages, credit cards and auto loans.
The funds rate also can drive rates on savings accounts and CDs higher, though the feed-through on that generally takes longer.

‘Strongly committed’ to 2% inflation goal

The Fed’s move comes with inflation running at its fastest pace in more than 40 years. Central bank officials use the funds rate to try to slow down the economy – in this case to tamp down demand so that supply can catch up.
However, the post-meeting statement removed a long-used phrase indicating that the FOMC “expects inflation to return to its 2 percent objective and the labor market to remain strong.” The statement only noted that the Fed “is strongly committed” to the goal.
The policy tightening is happening with economic growth already tailing off while prices still rise, a condition known as stagflation.

First-quarter growth declined at a 1.5% annualized pace, and an updated estimate Wednesday from the Atlanta Fed, through its GDPNow tracker, put the second quarter as flat. Two consecutive quarters of negative growth is a widely used rule of thumb to delineate a recession.
Fed officials engaged in a public bout of hand-wringing heading into Wednesday’s decision.
For weeks, policymakers had been insisting that half-point – or 50 basis point – increases could help arrest inflation. In recent days, though, CNBC and other media outlets reported that conditions were ripe for the Fed to go beyond that. The changed approach came even though Powell in May had insisted that hiking by 75 basis points was not being considered.
However, a recent series of alarming signals triggered the more aggressive action.
Inflation as measured by the consumer price index rose 8.6% on a yearly basis in May. The University of Michigan consumer sentiment survey hit an all-time low that included sharply higher inflation expectations. Also, retail sales numbers released Wednesday confirmed that the all-important consumer is weakening, with sales dropping 0.3% for a month in which inflation rose 1%.
The jobs market has been a point of strength for the economy, though May’s 390,000 gain was the lowest since April 2021. Average hourly earnings have been rising in nominal terms, but when adjusted for inflation have fallen 3% over the past year.
The committee projections released Wednesday see the unemployment rate, currently at 3.6%, moving up to 4.1% by 2024.
All of those factors have combined to complicate Powell’s hopes for a “soft or softish” landing that he expressed in May. Rate-tightening cycles in the past often have resulted in recessions.
Correction: Core PCE inflation ran at 4.9% in April. An earlier version misstated the month.

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Federal Reserve Chair Jerome Powell said Wednesday the central bank could raise interest rates by a similar magnitude at the next policy meeting in July.
“From the perspective of today, either a 50 basis point or a 75 basis point increase seems most likely at our next meeting,” Powell said at a news conference.

Federal Reserve Chair Jerome Powell said Wednesday the central bank could raise interest rates by a similar magnitude at the next policy meeting in July as it did in June.
“From the perspective of today, either a 50 basis point or a 75 basis point increase seems most likely at our next meeting,” Powell said at a news conference following the central bank’s policy decision. “We anticipate that ongoing rate increases will be appropriate.”

“The pace of those changes will continue to depend on incoming data and evolving outlook on the economy,” Powell said. “Clearly, today’s 75 basis point increase is an unusually large one, and I do not expect moves of this size to be common.”

Federal Reserve Chair Jerome Powell.
Xinhua News Agency | Xinhua News Agency | Getty Images

The central bank on Wednesday raised benchmark interest rates by three-quarters of a percentage point to a range of 1.5%-1.75%, the most aggressive hike since 1994.
Powell leaving the door open to another big increase came as a positive surprise to markets as many investors urged the Fed chief to show his seriousness in combating surging prices. Major equity averages jumped to session highs after Powell’s remarks.
Pershing Square’s Bill Ackman said earlier this week that the Fed “has allowed inflation to get out of control. Equity and credit markets have therefore lost confidence in the Fed.”
Ackman called on the central bank to act more aggressively to restore market confidence, saying a series of 1 percentage point hikes would be more efficient in tamping down inflation.

The Fed’s move Wednesday comes with inflation running at its fastest pace in more than 40 years. The Federal Open Market Committee said in a statement that it is “strongly committed” to returning inflation to its 2% objective.
According to the “dot plot” of individual members’ expectations, the Fed’s benchmark rate will end the year at 3.4%, an upward revision of 1.5 percentage points from the March estimate. The committee then sees the rate rising to 3.8% in 2023, a full percentage point higher than what was seen earlier this year.
“We will however make our decisions meeting by meeting and we’ll continue to communicate our thinking as clearly as we can,” Powell said.

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Builders have grown more pessimistic about the state of the housing market.
Sentiment, which has fallen for six straight months, is getting hit by higher interest rates.
Mortgage demand has fallen to less than half of what it was a year ago.

A contractor frames a house under construction in Lehi, Utah, U.S., on Wednesday, Dec. 16, 2020. Private residential construction in the U.S. rose 2.7% in November.
George Frey | Bloomberg | Getty Images

Sentiment among the nation’s homebuilders fell for the sixth straight month to the lowest level since June 2020, when the economy was grappling with shutdowns stemming from the Covid pandemic.
The National Association of Home Builders/Wells Fargo Housing Market Index fell 2 points to 67 in June. Anything above 50 is considered positive. The index hit 90 at the end of 2020, as the pandemic spurred strong demand for larger homes in the suburbs.

Of the index’s three components, buyer traffic fell 5 points to 48, the first time it has fallen into negative territory since June 2020. Current sales conditions fell 1 point to 77, and sales expectations in the next six months fell 2 points to 61.

“Six consecutive monthly declines for the HMI is a clear sign of a slowing housing market in a high-inflation, slow-growth economic environment,” said NAHB Chairman Jerry Konter. “The entry-level market has been particularly affected by declines for housing affordability and builders are adopting a more cautious stance as demand softens with higher mortgage rates.”
The average rate on the 30-year fixed mortgage has risen sharply since the start of the year. In January it was right around 3.25%, and as of Tuesday it hit 6.28%, according to Mortgage News Daily. Mortgage demand has fallen to less than half of what it was a year ago.
Builders also continue to face supply-side challenges.
“Residential construction material costs are up 19% year-over-year with cost increases for a variety of building inputs, except for lumber, which has experienced recent declines due to a housing slowdown,” wrote Robert Dietz, NAHB’s chief economist.
Regionally, on a three-month moving average, sentiment in the Northeast fell 1 point to 71. In the Midwest it dropped 6 points to 56. In the South it fell 2 points to 78, and in the West it dropped 9 points to 74.

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What the federal funds rate means to you

The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and saving rates consumers see every day.

“We’re certainly going to see the cost of borrowing escalate relatively quickly,” Spatt said.
With the backdrop of rising rates and future economic uncertainty, consumers should be taking specific steps to stabilize their finances — including paying down debt, especially costly credit card and other variable rate debt, and increasing savings, said Greg McBride, chief financial analyst at Bankrate.com.

Pay down high-rate debt

Since most credit cards have a variable interest rate, there’s a direct connection to the Fed’s benchmark, so short-term borrowing rates are already heading higher.
Credit card rates are currently 16.61%, on average, significantly higher than nearly every other consumer loan, and may be closer to 19% by the end of the year — which would be a new record, according to Ted Rossman, a senior industry analyst at CreditCards.com.

If the APR on your credit card rises to 18.61% by the end of 2022, it will cost you another $832 in interest charges over the lifetime of the loan, assuming you made minimum payments on the average $5,525 balance, Rossman calculated.

If you’re carrying a balance, try consolidating and paying off high-interest credit cards with a lower interest home equity loan or personal loan or switch to an interest-free balance transfer credit card, he advised.
Consumers with an adjustable-rate mortgage or home equity lines of credit may also want to switch to a fixed rate, Spatt said. 
Because longer-term 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the broader economy, those homeowners won’t be immediately impacted by a rate hike.

However, the average interest rate for a 30-year fixed-rate mortgage is also on the rise, reaching 6.28% this week — up more than 3 full percentage points from 3.11% at the end of December.
“Given that they’ve already gone up so dramatically, it’s difficult to say just how much higher mortgage rates will go by year’s end,” said Jacob Channel, senior economic analyst at LendingTree.

On a $300,000 loan, a 30-year, fixed-rate mortgage would cost you about $1,283 a month at a 3.11% rate. If you paid 6.28% instead, that would cost an extra $570 a month or $6,840 more a year and another $205,319 over the lifetime of the loan, according to Grow’s mortgage calculator.

Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising, so if you are planning to finance a new car, you’ll shell out more in the months ahead.
Federal student loan rates are also fixed, so most borrowers won’t be impacted immediately by a rate hike. However, if you have a private loan, those loans may be fixed or have a variable rate tied to the Libor, prime or T-bill rates — which means that as the Fed raises rates, borrowers will likely pay more in interest, although how much more will vary by the benchmark.
That makes this a particularly good time to identify the loans you have outstanding and see if refinancing makes sense.

Hunt for higher savings rates

While the Fed has no direct influence on deposit rates, they tend to be correlated to changes in the target federal funds rate. As a result, the savings account rates at some of the largest retail banks are barely above rock bottom, currently a mere 0.07%, on average.
“The rates paid by bigger banks are largely unchanged, so where you have your savings is really important,” McBride said.
Thanks, in part, to lower overhead expenses, the average online savings account rate is closer to 1%, much higher than the average rate from a traditional, brick-and-mortar bank.
“If you have money sitting in a savings account earning 0.05%, moving that to a savings account paying 1% is an immediate twentyfold increase with further benefits still to come as interest rates rise,” according to McBride.

Top-yielding certificates of deposit, which pay about 1.5%, are even better than a high-yield savings account.
However, because the inflation rate is now higher than all of these rates, any money in savings loses purchasing power over time. 
To that end, “one main opportunity out there is the possibility of buying some I bonds from the U.S. government,” Spatt said. 
These inflation-protected assets, backed by the federal government, are nearly risk-free and pay a 9.62% annual rate through October, the highest yield on record.
Although there are purchase limits and you can’t tap the money for at least one year, you’ll score a much better return than a savings account or a one-year CD.

What’s coming next for interest rates

Consumers should prepare for even higher interest rates in the coming months.
Even though the Fed has already raised rates multiple times this year, more hikes are on the horizon as the central bank grapples with inflation.
While expectations for those increases had been quarter and half-point hikes at each meeting, the central bank could hand out further 50 or 75 basis point increases if inflation doesn’t start to cool down.
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