The Fed just paused on raising interest rates. Here's what it means for jobs, prices, and your bank account this summer.
- The Federal Reserve announced Wednesday that it would not raise interest rates this month.
- It's the first meeting without a hike since March 2022 and signals economic optimism.
It's summer break for rising interest rates.
On Wednesday, the Federal Reserve announced it would take a breather after 10 consecutive interest rate hikes to reassess the health of the economy following some encouraging data on inflation.
"We have been seeing the effects of our policy tightening and demand in the most interest rate sensitive sectors of the economy, especially housing and investment," Fed Chair Jerome Powell said in a press conference following the decision.
The announcement comes after inflation numbers out Tuesday showed an overall slowdown in price growth — and even a decline in some categories. That, in addition to moderation in the job market, cleared the way for the Fed to pause its aggressive campaign to raise the interest rates at which businesses and consumers borrow money in hopes of cooling off spending and investment — and the economy overall.
It's important to note that a one-time pause doesn't mean interest rates won't rise any more at future meetings, but the committee signaled that an end is in sight. The decision included a projection of two more 25 basis point rate hikes before the end of the year.
In the same economic projections where the bulk of the Fed's decision makers said they expected those two additional rate hikes, those decision makers looked much more optimistic about economic growth and unemployment than in their previous projections from March, suggesting that the central bank could be seeing a path to the long-desired "soft landing" of bringing inflation down without a recession.
Insider's Noah Sheidlower has delved into the inflation numbers, so now let's zoom out and look at the bigger picture trends in the economy right now and what it means for your wallet.
Jobs are still going strong, and fewer rate hikes help
The harsh reality of the Fed's tool of raising interest rates is that, if it works like it should, it discourages businesses from making investments — and that includes jobs. Critics of the Fed's aggressive rate hikes over the last year have said they risk putting Americans out of work by squeezing businesses.
Massachusetts Sen. Elizabeth Warren said in November, "Powell risks pushing our economy off a cliff. And who will be most likely to lose their jobs? Not stock brokers and investment bankers. Nope. The people out of work will be low-wage workers and those already struggling most with rising prices. The Fed needs to slow down on these extreme rate hikes and remember its dual mandate of price stability and maximum employment. The jobs and livelihoods of millions of Americans hang in the balance."
However, the numbers have shown that this time around, businesses are not yet cutting jobs at a painful clip. Other than industries struggling with systemic business changes like tech and media, layoffs are not yet widespread. The unemployment rate sits at a low 3.7%, and job openings even ticked up in April.
The Great Resignation may be winding down, but for those looking to switch, it's still a good time to do it.
Food and energy prices are a relief, but housing and cars still hurt
While inflation has slowed, it's still high relative to what the US has seen in the past, and sits above the Fed's 2% target. Consumers can feel it.
Housing in particular is still the biggest driver of inflation, followed by used cars, despite the cost of new vehicles actually declining slightly in May. But a new report from Capital Economics points to a possibility that housing prices could fall in the second half of the year due to slowing demand driven by high mortgages and a weakening economy.
On the other hand, energy costs dropped in May and are now more than 11% below a year ago. Gas prices are down almost 20% in the same time frame. And airfare declined 3% in May.
Food is another positive as price growth was pretty much steady in May. Though food prices aren't sensitive to interest rates, Joe Brusuelas the chief economist at RSM wrote in comments that there's a possibility of a parallel slowdown in price increases in the category. "That is a very good development for households," Brusuelas said.
Kathy Gramling, EY Americas consumer leader, told Insider that the recent CPI data and the Fed decision will give consumers a bump of confidence going into the summer as Americans tap more into credit and embrace more practical shopping.
"That will continue to see the consumer spend their way through the summer," she said, "and as we know, American consumers are always good at that."
One big thing to watch is prices for services, which increased by 4.6% annually in May. Some economists worry services will be sticky, and could drive higher inflation later in the year.
Your bank account
Marta Norton, chief investment officer for Morningstar Wealth's America division, told Insider that the regional banking crisis kicked off by the failure of Silicon Valley Bank and First Republic this year is "the wild card."
While both banks were thrown lifelines, and others have held up and stayed solvent, consumers and banks alike could be worried about cracks in the system and tighten up the flow of funds that keeps the economy humming.
That tightening of lending was one of the factors in the Fed's decision to pause rate hikes this month, and the stability of the banking system will be one of the big things the central bank will be watching for the rest of this year as they decide whether and when to raise rates again.
Regardless of what happens, most Americans' bank accounts should be safe. The FDIC insures up to $250,000 of deposits, so even if more regional banks fail, anyone whose balance is below that threshold will be made whole. In the bank collapses this spring, the government went even further and protected all deposits, even those above that $250,000 line.
"While government programs have likely stabilized deposits and early failures are more likely the result of individual mismanagement and not a larger systematic risk, the savings & loan crisis, which lasted for years, showcases the uncertainty of these businesses at markedly higher interest rate levels," Norton said.
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