A year after the first rate hike, the Fed's next move in March is less certain (2023)

Higher interest rates in the future may seem like a slam dunk, but like many of life's so-called certainties, they're not.

Just a year ago, the Federal Reserve launched its first rate hike on March 16, 2022 to calm the worst inflation consumers have seen in decades. So far, through February, consumers have seen eight rate hikes.

The Fed is on track to raise interest rates for a ninth time at its next policy meeting on March 21-22. But the risk of a new financial crisis increases after March 21 and 22he suddenly collapsedSilicon Valley Bank, a California technology lender, on Friday. On Sunday, US regulators took control of New York-based Signature Bank in the cryptocurrency space.

Now analysts say the Fed is likely to delay next week and hold off on raising interest rates for now.

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It is clear that inflation has not disappeared. But the Fed's priority in the coming days will be to fight another conflagration, where stress is unfolding in large parts of the banking system. Federal regulators calmed the situation by taking emergency measures to support deposits of more than $250,000 at Silicon Valley Bank and Signature Bank of New York.

The Dow Jones Industrial Average had another volatile session on Wednesday, but rebounded at the close.

The Dow closed at 31,847.57 points, down 280.83 points or 0.87%. Wednesday's problems were based on concerns about Europe's banking crisis after Credit Suisse shares fell sharply.

Auto stocks fell. General Motors shares fell 3.57 percent, or $1.27 per share. shares, to close at $34.33 per share.

Stellantis closed at $16.87 per share, down 66 cents, or 3.76%.

Ford closed at $11.71 per share, down 22 cents, or 1.84 percent.

"The increased likelihood that banks are now tightening lending increases the risk of a recession," Sam Stovall, chief investment strategist for U.S. equities at CFRA Research in New York, said in a note on Wednesday.

Stovall told the Free Press that economically sensitive stocks, including autos and industrials, took a hit Wednesday on concerns that demand for those goods and services would fall if the U.S. slipped into recession.

The headaches of high prices continued

A year after raising interest rates, the Fed's work is not done.

The annual consumer price index rose 6% in February. This followed a 6.4 percent increase in January.

Of course, inflation eased slightly after peaking at 9.1% year-on-year in June – the biggest increase in 40 years. But the February inflation report was far from encouraging.

"Inflation is still too high for the Fed," said Gus Faucher, chief economist at PNC Financial Services Group. "Housing inflation remains very strong; we are starting to see rents fall, which should be good news."

A rate hike of at least 25 basis points next week and perhaps 50 basis points is more likely, Faucher said. Now there is more room for discussion.

According to Faucher's forecast, the Fed is still likely to start raising interest rates by 25 basis points next week, and then may hold off for a while. The most recent increase in February set the target range for the short-term federal funds rate at 4.5% to 4.75%.

After a year of raising rates, the Fed managed to keep employment high but missed its inflation target, Faucher said.

Regulators' swift response to the collapse of Silicon Valley Bank and Signature Bank on Sunday helped ease concerns about widespread problems in the banking system. As a result, Faucher believes the Fed may still have room to raise interest rates slightly next week.

Other analysts expect the Fed to hold off on tightening for now. According to a report by Goldman Sachsconsiderable uncertaintyAs for the rate course the Fed will take. According to the report, current expectations are that the Fed will not raise interest rates next week, but will likely do so at the May meeting and then likely at the June and July meetings.

"The Fed is likely to take a hawkish stance at next week's meeting as it reassess economic conditions," KPMG economist Diane Swonk wrote in a report titled "Stick Inflation."

"If the current crisis turns out to be temporary," she said, "the Fed will continue to raise interest rates. Otherwise, we could have a harder landing."

Consumers were resistant. However, consumer budgets are getting tighter these days, after more than a year of rising prices, rising interest rates and falling stock markets. The Dow Jones Industrial Average closed at 35,294.19 on March 29, 2022, a strong finish in the days following the initial rate hike, but below its all-time high of 36,799.65 on January 4, 2022.

Since its record close a year ago through March 13, the Dow has lost nearly 15.65%.

It remains questionable how confident some consumers, even affluent ones, will be about their future spending. If we see more tension in the stock market, the banking system and possible future jobs, consumers may cut back on spending even if the Fed doesn't raise interest rates further.

What will happen to the interest rate?

Some interest rates — notably including mortgage and auto loan rates — are not directly tied to the short-term federal funds rate, which the Fed sets at its policy meetings. Experts say these rates are likely to fall in the coming days.

Mortgage rates, which typically track 10-year U.S. Treasuries, fell to 3.54% on Monday from around 3.97% last Tuesday, said Ted Rossman, senior analyst at Bankrate.com.

Auto loans, which tend to track five-year Treasury bills, fell to 3.68% on Monday from 4.32% the previous Tuesday, he said.

Investors poured money into U.S. Treasuries on Monday, pushing yields lower in a flight to safety amid stock volatility.

Now, borrowers could see a significant drop in future auto loan and mortgage interest rates, Rothman said.

Credit cards and private equity lines of credit follow the Fed's actions more closely, so borrowers are less likely to see changes to those products soon, Rothman said.

People buying a car can expect an average auto loan rate of 6.48% for a five-year auto loan, up from an average of 3.98% a year ago, according to data released Wednesday by Bankrate.com.

Near-rising mortgage interest rates have cast a pall over the once-hot real estate market. The average 30-year mortgage rate hit 6.84% last week, up from 4.14% a year ago, according to a Bankrate.com survey.

But mortgage rates have retreated, with the average rate now at 6.66%, according to the latest Bankate.com data released Wednesday.

According to the latest Bankrate.com report, the average interest rate on home equity lines of credit — where people borrow money against their homes — rose to 7.76 percent from 3.96 percent a year ago. Such lines of credit are usually used for home improvements, paying off other more expensive debts and making large purchases.

Some consumers are stressed

Jonathan Smoke, chief economist at Cox Automotive, said credit card and auto loan delinquencies indicate stress in some households, particularly among consumers with subprime credit scores.

"This is despite very low unemployment and relatively strong wage growth," he said.

questions?

"Consumers are juggling child support obligations," Smoke said. "And increasingly, using credit card debt seems to be part of the trick."

The cost of carrying credit card debt is too high. The average credit card interest rate is now 20.04%, up from 16.34% a year ago, according to Bankrate.com. Even more troubling, many people with low credit scores face much higher than average interest rates if they have a credit card balance or want to buy a new or used car with a car loan.

Now, thanks to the cash tax credit, many consumers can continue to spend and pay their bills to some extent. But these repayments are not as lucrative as they were a year ago.

The average federal income tax refund was $3,028 a year. March 3, according to the latest data from the tax administration. But the average fell 11 percent from the year before.

So far this year, more than $127 billion in refunds have made their way into consumer wallets, down 1.5% from the year before.

The IRS launched more refunds earlier this season, which has been a huge help to many families. As of March 3, there were a number of refunds issued earlier this seasonAn increase of 10.6 percent.

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"My guess is we'll probably see more consumer refunds after the tax refund season is over," Smoke said.

With average tax refunds down, tax refund season is unlikely to boost the economy the way it did a year ago, Smoke said.

"Consumers are getting less and less, and the seasonal growth in spending that we're seeing, particularly in the used car market, is likely to be substandard," Smoke said.

Demand for cars in retail fell 10 percent last year. For those buying a used car, affordability is even more difficult due to high prices and high interest rates.

"Manufacturers would rather reduce or maintain their current sales pace than risk increasing production in an uncertain economic environment," Smoke said. "They can sell more, but given the pressure from consumers, they have to lower prices and increase incentives to see a real improvement in demand."

There is still buying power in the luxury end of the car and truck market, but even that demand will disappear if a recession hits, Smoke said.

What will happen to the savings rate?

Savers are seeing solid promotions for savings accounts and long-term savings products like certificates of deposit at major credit unions, online banks and elsewhere.

The average interest rate on a 12-month certificate of deposit is now 1.62%, up from 0.19% a year ago, according to Bankrate.com data released Wednesday. but it's not hard to findOne-year promotional CD4% and 4.5% respectively.

If the Fed eases policy, we could see a decrease in interest rates, especially for five-year CDs. But some banks may continue the campaign.

Ken Tumin, Founderdeposit account, which is part of LendingTree and tracks and compares bank rates, said some savers may see certain institutions offer higher CD rates, but lower rates may also lead. Much will likely depend on the bank's strategy, the direction the Fed takes and the overall outlook for the economy.

For example, Ally Bank, which is insured by the FDIC, suddenly increased its 11-monthwithout penalty cdThe annual yield rose from 4% to 4.75% over the weekend. "This is the highest penalty-free CD rate in the country," Tooming said Monday. There is no minimum deposit. Ally called the account "easy money" on the Internet.

After the first six days of depositing money into the CD, Ally customers are free to withdraw the entire amount without any penalties for the penalty-free product, Tumin said. He points out that several online banks offer higher rates for 12-month CDs, but those CDs don't have this penalty-free feature.

Ally may have reason to get aggressive now that the bank is involvedEt MarketWatch-fragmentLast week, it was one of 10 banks that could face problems after the collapse of the SVB financial group.

"Prior to the Fed's announcement on Sunday, I think Ally was concerned that they might see a serious loss of deposits from panicked clients," Thumin said.

Ally did not respond to a Free Press request for comment.

After the Silicon Valley bank failed, Tomin says he thinks it's very importantmaybe allie decidesThis new high rate was offered to encourage customers to keep their deposits with Ally, noting that the new rate was announced on a Saturday, a very unusual time for such a change.

Frankly, much of what we do here can hardly be called routine.

Contact Susan Tompor:stompor@freepress.com.Follow her on Twitter@hram.To subscribe, visitfreep.com/special offer.