Fed’s Interest Rate Hikes in 2022 & 2023 – What the May Raise Means for You

Quick Look

• The Fed raised interest rates by 25 basis points on May 3, 2023.
• Economists expected this, but there was more uncertainty around this hike than past ones.
• Due to the Fed’s raise in May 2023, interest rates on credit cards and mortgages increased.
• Savings account yields increased as well.
• The Fed hopes to stop hiking rates after May 2023, but that depends on inflation and the economy.

The Federal Open Market Committee of the Federal Reserve hiked the closely watched federal funds rate by 25 basis points at its meeting in May 2023. Federal Reserve Chair Jerome Powell announced the move at 2pm Eastern Time on Wednesday, May 3.

The FOMC’s May 2023 rate increase is the latest in a series of hikes beginning in early 2022. It boosted the target federal funds rate to a range of 5.00% to 5.25%, a 25-basis-point jump from the March 2023 range and a 500-basis-point increase from the beginning of 2022. The higher rate immediately increased borrowing costs for consumers and businesses.

The Fed met again on June 13 and 14, 2023, and as expected, chose not to raise the federal funds rate again — while leaving the door open to future increases.

Recent instability in the banking sector — most notably the collapse of Silicon Valley Bank and Signature Bank, both large institutions with major exposure to tech and crypto — combined with cooling inflation data to convince the Fed to hold off on a rate increase. But Chair Powell made clear that future increases were on the table if inflation remained significantly above the Fed’s 2% long-term target.

Find out what happened at this Fed meeting, what it means for the broader economy, and how you can prepare your finances for what’s to come.

The FOMC’s June 2023 Meeting

The market’s expectation for a 25-point hike came amid commentary by key Federal Reserve governors, including Christopher Waller and Chair Powell himself, that the FOMC could moderate its aggressive stance.

The Fed raised rates at an unprecedented pace in 2022 amid persistently high inflation, and recent economic data suggested their efforts were beginning to pay off. The labor market was moderating, the red-hot housing market was cooling, and most importantly, inflation appeared to be peaking.

Those trends haven’t entirely reversed since earlier this year, but there’s new uncertainty as to how effective the Fed’s rate hikes have actually been. Or, framed differently, around how “sticky” inflation and labor market momentum are proving to be.

Macroeconomic data releases in February and early March showed a still-hot economy and still-too-high-for-comfort inflation. For example, the January 2023 figures for closely watched Consumer Price Index (CPI) — released on February 14 — came in at +0.5% month-over-month, higher than expected.

February 2023 nonfarm payrolls data also came in hot at 311,000 jobs added, well above the “status quo” baseline of about 100,000 jobs per month and significantly more than Wall Street expected. Perversely, the Fed wants to see clear signs that the economy is cooling, like flat or negative month-over-month changes in payrolls, before pausing or reversing its rake hikes.

But inflation cooled as spring wore on, coming in at just +0.1% month-over-month in April. And growing instability in the banking sector, led by the sudden collapse of Silicon Valley Bank — one of the 20 largest banks in the U.S. — on March 10, is another concerning data point. Following a multiday run on deposits, the FDIC stepped in to guarantee all deposits at Silicon Valley Bank, including those over the customary $250,000-per-customer deposit insurance limit.

On March 11, the FDIC took over New York-based Signature Bank, a smaller but still quite large institution. Shares of major regional banks like First Republic Bank, Keybank, and PacWest Bancorp tanked on the news, raising legitimate fears of further bank runs and a potential repeat of the financial contagion we saw during the Great Financial Crisis of 2008 and 2009.

The federal government seems committed to guaranteeing all deposits in these newly shaky institutions, insured or not. But that might not matter because bank runs are inherently irrational. All it takes is a widespread perception that one’s money isn’t safe in a particular bank, and the rush is on.

All this is to say that at the beginning of March, the odds were that the Fed would raise rates by 25 or 50 basis points on May 3. Following the collapse of Silicon Valley Bank, expectations dialed back such that a 25-point increase was still slightly favored, but a “no change” response would no longer have come as a shock. Likewise, an overwhelming market consensus built that the Fed would officially pause interest rate increases in June.

As always, traders will closely watch Chair Powell’s comments at his customary post-announcement press conference, when he’ll answer questions from financial journalists desperate for insight into the FOMC’s thinking. As is sometimes the case, his apparently hawkish posture at the February press conference — got traders rethinking their expectations of an imminent pause in the hiking cycle and set the market on a downtrend. Notably, Chair Powell sounded more dovish at the March press conference, suggesting the May increase will be the Fed’s last for some time.

We don’t get invited to these meetings, unfortunately. Were we in attendance at the May press conference, we’d ask Chair Powell these four questions.

Why Is the FOMC Pausing Interest Rates Hikes in June 2023?

In a word, inflation is cooling off. 

Though annualized inflation remains above 4%, higher than the Federal Reserve’s 2% target, the Fed appears willing to wait and see how its rapid rate increases have affected the broader economy.

Since 2022, the FOMC has been rerunning the Fed’s playbook from the early 1980s, when then-Chair Paul Volcker pushed the fed funds rate to 19% in a bid to quash sky-high inflation. And that appears to be working.

How Do Fed Funds Rate Hikes Affect the Economy?

The federal funds rate is a key benchmark interest rate for banks and other lenders. Raising it increases the cost of the short-term loans most financial institutions need to operate normally. They pass those costs to their borrowers via higher interest rates on credit cards, real estate loans, and business loans and credit lines.

The correlation isn’t always perfect, but economic activity tends to slow as borrowing costs increase. Consumers buy less on credit and put off major purchases. Businesses delay or cancel planned investments. They may lay off contractors and employees if they can’t control costs elsewhere. 

With businesses making less money and fewer people drawing paychecks, a feedback loop develops. Demand for goods and services falls. The economy slows further, maybe tipping into recession. Declining demand helps cool inflation, but at the (hopefully temporary) cost of livelihoods and profits.

When Will the Fed Stop Raising Rates?

Economists expect the federal funds rate to top out sometime in 2023. They expect a terminal rate — the highest the Fed will let the funds rate get before it pauses or reverses its hikes — of between 4.75% and 5.25% in May and June 2023, according to the FedWatch predictive tool. But some banks expect a terminal rate closer to 6%, which would cause even more economic pain.

Once it hits the terminal rate, the Fed will probably keep rates steady for a while, unless the economy is in really rough shape. Then it’ll pivot — market-speak for beginning a rate-reduction cycle. Markets love it when the Fed pivots because it means lower borrowing costs and, usually, higher business profits.

Will the Fed Cause a Recession?

According to Reuters’ October 2022 economist survey, it’s likelier than not. About 65% of respondents predicted a U.S. recession by the fourth quarter of 2023.

Chair Powell seems unbothered by the possibility of a recession. Though he hasn’t said outright that he’s rooting for a recession, he’s on the record saying that asset prices (especially real estate values) need to come down. And in August, he told attendees at the closely watched Jackson Hole Economic Symposium that the Fed’s commitment to fighting inflation was “unconditional.” 

The stock market tanked as he spoke.

What Fed Rate Hikes Mean for Your Finances

What do the Federal Reserve’s interest rate hikes mean for your wallet? Four things:

• Your Credit Card Interest Rate Will Go Up. Like clockwork, credit card companies raise interest rates in lockstep with the Fed. Credit card rates increased by 25 basis points within a week of the May 2023 rate hike.
• Your Savings Account Yield Could Increase. The relationship between savings yields and the federal funds rate isn’t quite as strong, but it’s still there. Banks just tend to raise yields more slowly than the Federal Reserve because they make money off the spread between what they pay customers and what they themselves pay to borrow. 
• Your Fixed Mortgage Rate Won’t Increase. Your fixed mortgage rate is, well, fixed. At this point, refinancing probably isn’t in your best interest, so just sit back and enjoy the rate you locked in when money was cheaper. If you have an adjustable-rate mortgage, your rates will go up, and it might be time to consider refinancing before it gets worse.
• Your Retirement Portfolio Will Remain Volatile. It has been a rough year for stocks and bonds. We’re not in the business of stock-picking, but it’s a fair bet that market volatility will persist due to ongoing economic uncertainty and uncertainty around just how far the Fed will go to fight inflation.

Your Personal Finance Playbook: What to Do As Interest Rates Rise

The negatives of higher interest rates outweigh the positives, but it’s not all bad. Do these things now to protect yourself and make your money work harder.

• Move to a High-Yield Savings Account. After the May 2023 hike, the most generous savings accounts yielded around 5%. This is still much lower than the inflation rate, but it’s better than traditional big banks’ paltry savings yields, which haven’t budged during this hiking cycle. Move your money if you haven’t already.
• Pay Off Your Credit Card Balances. You should never carry a credit card balance if you can avoid it, but it’s especially painful when interest rates are high. Make a plan to pay off your existing balances as soon as you can. If you need help, work with a nonprofit credit counseling agency.
• Hold Off on Buying More Series I Bonds. They were your best bet to fight inflation until now. Unfortunately, the rate on new I-bonds has tanked as inflation cools, and bonds issued between May 1 and Oct. 31 of 2023 yield just over 4%. Rates reset twice per year, on Nov. 1 and May 1, but they’re unlikely to climb significantly at the next reset, so savings accounts will likely offer higher yield moving forward.
• Buy a New Car Sooner Than Later. Auto loans are a weird bright spot for consumers so far this hiking cycle. Dealer financing rates haven’t increased much since 2021 as car dealers fight softening demand for new cars while undercutting banks and credit unions that also offer auto loans. Plus, both new and used car prices are coming down to earth as supply increases and demand cools.

How We Got Here: Fed Funds Rate Hikes in 2023

The FOMC has raised rates at a breakneck pace in 2022. 

The current federal funds target rate is 500 basis points higher than it was at the beginning of 2022. The gap will continue to increase with each subsequent Fed rate hike.

Markets and economists are divided on what happens next, however. Expectations were reasonably well-set for a 25-point rate hike at the FOMC’s May 3 meeting, but there’s not much consensus that it’ll be the last hike for a while. Then again, if the economy really hits the skids this summer, the Fed could start cutting rates as soon as Q3 2023.

But nothing is set in stone. It all comes back to what the economy does in the meantime. Hotter-than-expected inflation readings or job growth numbers in Q2 2023 could convince the Fed to hike longer and higher than expected, even if it results in a longer, deeper recession than forecast. If the economy looks to be cooling faster than anticipated, it’s not out of the question that the Fed does nothing for a while, or even begins cutting rates.

In that case, markets will inevitably look ahead to the next big question of the current Fed cycle: when and by how much it’ll start cutting the federal funds rate.

In any event, the rapid increase comes after two years of rock-bottom interest rates. The Fed slashed rates by 150 basis points between February and April 2020 as the COVID-19 pandemic pummeled the economy. They stayed near zero through 2021. 

One More Fed Move to Watch: Quantitative Tightening

The FOMC’s interest rate decisions might grab headlines, but they’re not the only moves the Fed makes to steer the economy. 

Since the Great Financial Crisis of the late 2000s, the Fed has been in the business of buying, holding, and (occasionally) selling U.S. government bonds and other government securities. When the Fed buys securities, it’s called quantitative easing (QE). When it sells them or allows them to mature without replacing them, it’s called quantitative tightening (QT).

Quantitative easing increases the U.S. dollar supply, which is why some say the Fed “prints money” in response to economic weakness. Quantitative tightening decreases the dollar supply, though you don’t hear much about the Fed “burning money” to fight inflation.

Quantitative Tightening in 2022

The Fed bought more than $4 trillion in government securities between early 2020 and early 2022, adding to a sizable stockpile left over from the Great Financial Crisis. It began QT in June 2022 and accelerated the pace in September. 

Since then, the Fed has reduced its balance sheet by about $95 billion each month. But with nearly $9 trillion still on its books, it’ll take more than 7 years to fully unwind its purchases. That’s far longer than economists expect the current cycle of interest rate hikes to last — and assumes no economic crises that demand quantitative easing between now and then. 

Why Quantitative Tightening Matters for You

QT isn’t some abstract high-finance maneuver. By increasing the supply of U.S. government bonds, it puts upward pressure on rates, compounding the effects of fed funds rate hikes. For example, the yield on the closely watched 10-year U.S. Treasury bill jumped from about 1% in January 2021 to about 4% in late October 2022.

The combined effect of QT and fed funds rate hikes shows up in interest rates tied to both benchmarks, like mortgage rates. That’s why the average 30-year fixed rate mortgage rate increased by about 450 basis points between January 2021 and October 2022 — compared with just 300 basis points for the federal funds rate.

So if you’re in the market for a new house or want to open a home equity line of credit soon, the fed funds rate won’t tell the whole story. If the Fed accelerates QT, bond yields — and thus mortgage rates — could continue to rise even after rate hikes cease and inflation floats down to historical norms.