July Fed Rate Hike may be the last.
July Fed Rate Hike may be the last.
ANBLE’s Economic Outlook: The Federal Reserve’s Decision and Its Impact on the Economy
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The Federal Reserve’s hike of short-term rates by a quarter of a percentage point on July 26 may be its last for a while. This decision comes as the economy has shown resilience, with early signs of moderating inflation and wage growth, along with expectations of a gradually slowing economy for the rest of this year and early next year. If recent weakening trends continue, the Fed is likely to hold off on further rate hikes. However, if the economy shows unexpected strength, the Fed may raise rates once or twice more.
Chair Jerome Powell has repeatedly emphasized that it would be a mistake to cut rates too early and risk letting inflation rebound. Therefore, the Fed is extremely unlikely to actually cut rates this year, given the outlook for moderate economic growth. If there is a meaningful slowdown, the Fed may start cutting rates next year.
As the federal funds rate increases, other short-term interest rates also rise. Rates on home equity lines of credit are typically connected to the fed funds rate, moving alongside it. Rates on short-term consumer loans, such as auto loans, have also been affected. Buyers with good credit can expect rates around 7% on six-year auto loans.
Mortgage rates, on the other hand, will stay elevated until there is more progress in the inflation fight. Thirty-year fixed-rate loans are averaging 6.9%, near their 7.1% peak in early November, while 15-year fixed-rate loans are around 6.3%. Mortgage rates react to changes in the 10-year Treasury yield, and they tend to stay higher for longer when inflation is high.
- Mortgage and refinance rates for July 31, 2023 ended slightly lower.
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A better economic outlook has caused rates on AAA and BBB corporate bonds to edge up, while rates on CCC bonds have declined. Higher-rated bonds are ticking up a bit on fears of possible future Fed rate hikes, but lower-rated bond prices are improving as fears of a pickup in bankruptcies ease. AAA bonds are now yielding 4.7% and BBB bonds 5.8%, while CCC-rated bond yields stand at 13.5%.
Overall, the Federal Reserve’s decision to hike rates reflects the economy’s resilience and moderating inflation, but also recognizes the need to monitor future trends. The Fed is aware that past rate hikes take time to fully affect the economy, and it will likely choose to hold off on further hikes if recent weakening trends continue. However, if the economy shows unexpected strength, the Fed may opt to raise rates once or twice more. It is expected that the 10-year Treasury bond yield will stay around 4.0% until a clear direction for the economy emerges.
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