Considering the Federal Reserve issued its fourth consecutive 75-basis point interest rate hike last week, what does this mean for the North Texas community?
To start, higher interest rates mean local businesses, banks, and homebuyers will pay more to borrow money. More importantly, consumers will be forced to pay higher interest rates for their credit cards, mortgages, car loans, and business loans.
The increase in mortgage rates since the start of 2022 has the same impact on affordability as a 35% increase in home prices, according to Greg McBride, the chief financial analyst at Bankrate.com.
McBride explained that if a homebuyer got approved for a $300,000 mortgage at the beginning of the year, that’s equivalent to less than $200,000 today.
So far this year, the Federal Reserve has raised interest rates six times: +0.25% in March, +0.50% in May, and +0.75% in June, July, September, and November. Analysts are predicting the Fed’s last rate hike of 2022 will be +0.50% during the final Federal Open Market Committee (FOMC) meeting scheduled for December 14.
From a starting point of 0.08% in January, the benchmark federal funds rate, the interest rate that banks charge each other to borrow or lend excess reserves overnight — the Fed’s foremost monetary policy tool — had risen between 3.75% and 4% by November, the highest borrowing cost since the 2008 great recession.
Further rate hikes are expected in 2023, with projections estimating the benchmark rate will climb between 4.50% to 4.75% before reaching its peak, according to the U.S. central bank’s forecasts.
The Fed is still far from achieving its desired effect, said Bill Dendy, a CPA and certified financial planner at Raymond James. “This is the most aggressive we’ve seen the Fed in decades,” he said. “The challenge here is it takes a while for the raising of the interest rates to actually slow down the economy,”
Fed Chairman Jerome Powell has emphasized that monetary policymakers will not reverse course on aggressive rate hikes until the trajectory of inflation has signified persistent downward pressure for a sustained period.
Throughout this year’s post-FOMC news conferences, Powell has repeatedly stated that he is waiting for three economic conditions to be met before the Fed will reverse course.
Powell wants to see evidence of three key indicators before he chooses to soften financial conditions: 1) a period of below-trend growth, 2) a softening labor market, and 3) inflation on pace to 2%. None of the three conditions have been presently met, however.
The U.S. economy has remained resilient and has not yet experienced a period of below-trend growth, as the Fed has hoped. Gross Domestic Product (GDP) grew by 2.6% during the third quarter of 2022, despite negative growth during the year’s first half.
The labor market, which remains strong amid tightening economic conditions, added 263,000 jobs in September, with job openings increasing by 437,000 to 10.7 million.
With no real signs that inflation has begun to slow or reversed course, North Texans should not expect to see a Fed pivot anytime soon. Inflation increased 8.2% year-over-year, rising 0.4% in September on a seasonally adjusted basis after rising 0.1% in August, the Labor Department said.
At the end of the holiday season, it may take three or four months for people to pay back all the money they spent, Dendy said. He said that paying this money back will cost more this year than it did last year, the year before, or the past 20 years.
As economic pressures build for consumers, he said, it is a great time to revisit budgets to ensure maximum enjoyment for every dollar spent. He added it is also crucial that “we are not carrying debt unnecessarily and that we are paying attention as those interest rates move up.”
Smaller rate hikes are projected for the federal funds rate until mid-2023, according to the Fed’s “Dot Plot,” a chart that shows projections for the federal funds rate. With Powell not expected to lift his foot off the gas till sometime next year, North Texans should be cautious about mismanaging finances leading up to 2023 and beyond.