Did you see the news recently? Fed Chairman Jerome Powell announced no rate increase at this time. That now makes two times this year when the Fed chose NOT to raise interest rates. Compare that to last year when they were acting like drunken sailors raising the rates every time they got together. Currently, the official Fed interest rate is 5.5%. It hasn’t reached that level since 2006. The Fed thinks a normal healthy interest rate should be around 2.6%. The Fed is currently projecting that will be the rate in 2026.
Perhaps they have learned from history. When the Fed raises interest rates, there are immediate consequences, such as higher mortgage rates, higher auto loan rates, etc. but the long-term changes take time. In the past the Fed was guilty of raising rates too high, too quickly, and by the time they realized they had gone too far, a recession had resulted. This time, the Fed is trying hard to apply those painful lessons from the past and pause to look out on the horizon to see if they are having the desired impact.
The Fed’s number one “enemy” is inflation. What is interesting, is the method for measuring inflation has changed…a lot! In the early 1980’s inflation hit almost 15%. Then they took out the “volatile” items to reach a new rate called “core inflation.” It is estimated that if we measured inflation today using the same methods as 1980, the current inflation rate would have peaked in January at about 15%. (The new core inflation rate was pegged at about 9% in January 2023.) Today, inflation has fallen. According to the “core inflation” rate rules, we are currently at about 4%, but using the old method for measuring inflation, we are currently at about 11%. Thus, the Fed sees inflation going down, which was their goal. FYI, their core inflation target is 2%.
Another economic measure the Fed tries to control is employment/unemployment rates. Currently the unemployment rate is 3.8%, which is normally considered about right. This has made the Fed feel a bit confident that the long-term pressure to bring inflation down is an unemployment rate between 3.5 and 4%. It takes a while for employment activity to impact inflation, thus another reason for the pause in rate hikes.
What does this mean for the average American? If you can hold off on purchases that require borrowing until late 2024 or into 2025, you will save a bundle in lower interest rates. Homes, and cars are the big-ticket items I’m talking about. If you need a new home now or a new car now, go ahead and purchase. You can refinance the home when rates come down. You can always pay off the car loan early using other lower interest rate borrowing. Another impact is wages. Recently, all the Nevada state employees got a long overdue raise. Hopefully the private sector has been doing a better job of incremental raises to keep up with inflation. For the end of 2023, you private sector employees might expect to see a raise in the neighborhood of around 4%.
Have you heard? Prov 4:7 says, “Wisdom is supreme. Get wisdom. Yes, though it costs all your possessions, get understanding.”