The Federal Reserve has decided to leave interest rates unchanged at its latest policy meeting yesterday. However, the Fed hinted that rates will finally be coming down at its next meeting, scheduled for September.
Why Are Interest Rates High Right Now?
If you’ve bought a house, or car, or applied for any type of loan, you’ve probably noticed that interest rates have gone up in the past few years. That decision was made by the Federal Reserve. While they do not directly control interest rates on individual loans, they do control the rates they charge to banks, which trickles down to the consumer.
In the wake of the Covid-19 pandemic, inflation increased dramatically across the world. The pandemic forced industries across the world to lower production, while governments pumped out stimulus to help people get by. A flood of dollars chasing limited goods created the perfect inflationary storm.
In response to inflation, the Federal Reserve increased the interest rate it charges to banks. They in turn increased the interest rates they charged consumers. The idea is to slow economic activity enough to lower inflation, but hopefully not cause a recession. This is known as a soft landing.
Such actions by the Fed typically result in recessions. Soft landings are exceedingly rare, but it appears the central bank may have pulled it off this time.
When Will The Federal Reserve Lower Rates?
Earlier this year, most pundits believed a rate cut was coming by the summer. Some even thought they could hit in March. However, inflation rebounded a bit in the first quarter, and the Federal Reserve was forced to dig in with its higher rates.
After a small bump in the road earlier this year, inflation has continued on a downward track from the second quarter on. All signs point to a rate cut in September as inflation nears the 2% goal the Fed has set.
It’s important to note that Federal Reserve chairman Jerome Powell has stated numerous times that he will not wait for inflation to exactly hit the 2% goal before cutting rates. Doing so would risk damage to the economy and possibly cause a recession. As long as there is a continuing trend towards the 2% goal, the Fed will safely cut rates before unemployment goes up too high.