This Will Be The Highest Rate Level In Five Years

The market and its participants await the Fed's decisions. The Federal Reserve’s job hasn’t been easy amid this year’s economic volatility.

What to expect?

The Consumer Price Index, a key inflation gauge, rose 8.3% year over year in August — well over the Fed’s 2% target. The stock market hasn’t been well-behaved either: The S&P 500 index is down by more than 10% so far this year.

Analysts and traders expect interest rates to rise again. The Fed is not used to surprise, so there is a high probability that just such a decision will be made.

Analyzing the data from previous periods, it can be noticed that the interest rate increase in September '22 will be recorded as the highest in 5 years. The last level of 2.50% interest rates was in 2019. There are many indications that the rates will also increase by 75 bp this time. The final decisions of the Fed will be announced on Wednesday. Such a move would put the Fed’s benchmark interest rate in a target range of 3-3.25 percent, the highest since January 2008.

Such decisions will surely be felt on consumer’s wallets. Credit card rates, meanwhile, jumped beyond 18 percent and surged to the highest level since January 1996.

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Source: investing.com

Bloomberg analysts assume that the high level of interest rates will continue in 2023. the market expects the Fed to hold rates close to the 4.5% level for much of 2023 and sees a much less dramatic path for rates.

Why the Fed rising rates?

At first, it is needed to explain what is fed’s rate. The federal funds rate, which is guided by the Federal Reserve’s Federal Open Market Committee, is the interest rate at which banks can borrow money from each other.

The goal of the Fed decides to raise rates again is to keep inflation in check. The Federal Reserve must make a decision that will ensure a healthy labor market and stabilize prices in the economy.

Higher interest rates decrease spending by making it more expensive to borrow money. That decreases demand for goods and services throughout the economy, then slows down the price increases that we call inflation. Banks make money by lending money at a low interest rate and then lending it to customers at a higher rate. Changes in federal fund interest rates flow through the banking system, affecting interest rates on a variety of things, including mortgages and bonds.

Therefore, banks may lose on the raise because there are fewer people willing to take out various types of loans.

But when the Fed raises interest rates, it also runs the risk of hurting the economy — and the stock market in particular — by slowing down spending too much.

The summary of economic projections too, will provide hint on future rate decisions. For traders, it is not the decision but the comments that may be important.

Souece: https://www.bloomberg.com/news/articles/2022-09-16/fed-seen-raising-to-4-in-2022-and-signaling-higher-for-longer?leadSource=uverify%20wall, investing.com