Fed Expected to Hike Interest Rates for First Time in 3 Years

Remember this date: July 26, 2023.

That’s the last time the Federal Open Market Committee announced an interest rate hike. Wednesday may be the next.

At that 2023 meeting, the FOMC raised the federal funds target range by 25 basis points, from 5.00%–5.25% to 5.25%–5.50%. Will the FOMC announce an increase at 2 p.m. Wednesday after the two-day Fed meeting? Experts believe the committee will.

Yahoo! Finance reported a heavy bias toward raising the Fed funds rate 25 basis points to +3.75-4.00%—which would be the first move on rates since December of last year. In fact, some predictors say there’s a +90% chance rates go up.

Interest Rates

Tariff policy and oil prices since the war with Iran have taken inflation levels well above the optimal 2%, and now Yahoo! Finance reported that bond yields are +5% or higher on the 10-year and the 30-year. The two-year yield, at +4.65%, is still 90 basis points above the high end of interest rates currently.

According to the Associated Press, a quarter-point increase in the Fed’s rate, currently about 3.6%, isn’t guaranteed because Fed Chairman Kevin Warsh doesn’t provide the signals about next moves that his predecessors did. Most analysts and economists, however, expect an increase after a speech two weeks ago at the Fed’s annual conference in Jackson Hole, Wyoming, in which Warsh argued that the central bank had not yet achieved its goal of putting inflation in check.

The AP noted that a rate increase would throw another sharp shift into a volatile period for the economy and financial markets.

As recently as March, the Fed had forecast it would cut its rate once this year, but with the Iran war flaring up again and causing steep increases in oil and gas prices, inflation is likely to remain higher than the Fed’s 2% target for even longer.

Midterm Elections

“I don’t see any end to the war in Iran right now,” Kristin Forbes, an Economist at MIT’s Sloan School, said. “Given what everyone has been through in the last few years of high inflation, consumers are more sensitive, companies are more sensitive, they raise prices faster … The risks are much more on more persistent inflation than it falling quickly.”

The Fed’s potential rate hike comes just seven weeks before the midterm elections in which high prices and affordability have taken important roles. President Donald Trump has demanded that the Fed cut rates, a move that isn’t on the table, and on Sunday Trump said, “the United States is so strong we should be paying the lowest interest rate in the world.”