The Fed just raised interest rates another 25 bps this week. That means that we’ve had almost a 5% increase in less than one year and puts the Fed Funds Rate at a 4.75-5% range.
Interest rate increases are one of the mechanisms the Fed uses to try and combat inflation. It’s working. At one point month-over-month inflation was over 9%. It has now fallen to 6%. Which is still too high compared to the targeted 2%-3% inflation that is preferred. That’s one of the reasons for the recent 25 bps increase.
Are the rate hikes over?
Now the question becomes whether or not there will be more rate hikes. The next meeting of the FOMC, the committee that determines this, is not until May 2nd-3rd.
If the economy continues like it has been performing, I expect the Fed to increase rates by another 25 bps at the May meeting.
- The Fed is targeting a 5.1% rate. Another 25 bps would put the range at 5%-5.25%, nesting 5.1% right in the middle.
- Unemployment is still holding strong. Jobless claims this week were 191k versus a 198k estimate. Continuing unemployment claims, meaning not new claims, were up only 14k.
- A good gauge of how the U.S. economy is performing is GDP. The last report had GDP at 2.7%. That’s not the almost 7% from Q4 of 2021, but it’s in line with other previous quarters.
What more rate hikes mean for you
A 5% increase, or more, in less than one year means that borrowing money has become more expensive. But, it also means that banks are finally paying a bit more for your deposits. I’m regularly seeing deposit interest rates at 4% or more.
My advice is to try and avoid borrowing money if you can. I’ve read some estimates that put us at a 70% chance of going into a recession. If that happens rate will likely come back down. If you can’t wait to borrow, then keep an eye on interest rates and look for a chance to refinance when rates do come back down.
On the flip side, if you have investable dollars, now is a great time to put your money to work for you. I just got a client 5.75% for 5 years.
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