In June 2022, the Federal Reserve raised U.S. interest rates by 0.75% in its most aggressive increase since 1994. The move aimed to stem inflation, which hit 8.6% in May 2022. Inflation numbers for the coming months of 2022 likely won’t see much improvement, with some experts predicting they may reach 9% once they’re formally calculated and announced.
Because rate increases from the Federal Reserve are a common tactic for mitigating inflation, it’s possible that another rate increase is coming soon. If you’re wondering when the next Federal Reserve rate decision is and if rates are potentially destined to rise, here’s what you need to know.
Why Did the Federal Reserve Rate Go Up in June?
The Federal Reserve raised rates in June 2022 as a means of combating inflation. It’s a standard strategy that governments often use to encourage certain financial positions or movements, stave off recessions and otherwise stabilize their economies.
Prior to March 16, 2022, consumers and businesses benefited from historically low interest rates. These led to affordable mortgages, lower loan interest rates and more competitive rates on other forms of lending.
The main reason for these low rates was to encourage spending and borrowing. When rates are low, new loans and similar products are more affordable to obtain. Additionally, interest rates on savings accounts tend to drop. The decision to lower rates was designed to help the economy recover from the COVID-19 pandemic.
On March 16, 2022, the Federal Reserve announced its first rate hike in over three years. At that time, inflation was becoming an issue in the U.S. economy, so the Federal Reserve increased rates by 25 basis points, which translates to a 0.25% increase.
Another 0.5% increase increase occurred in May 2022. This was tied to growing concerns about inflation, along with increased worries regarding the impact of the Russian invasion of Ukraine and China reintroducing COVID lockdowns in some areas. This was followed by the 0.75% increase in June 2022 as inflation began reaching a 40-year high.
How Do Interest Rate Increases Impact Inflation?
With inflation remaining an issue, many people wonder how rate increases actually have an impact. Generally, rate hikes are designed to slow demand and reduce spending while encouraging saving. When these changes take place, they create opportunities for economic equilibrium and, hopefully, metered growth.
As mentioned above, borrowing – including everything from mortgages and auto loans to home equity lines of credit and credit cards with adjustable rates – becomes more expensive when rates rise. Lenders use the Federal Reserve rate as part of their interest rate calculations. As a result, when the Federal Reserve rate increases, this trickles down to consumers and businesses.
Rate increases can also lead to more favorable interest rates on savings accounts and similar financial products. That can encourage households to forgo spending in favor of saving, allowing them to capture a benefit from the rising rates.
While the approach can be effective, this time, it’s marred by a shift in consumer attitude. Prior to the pandemic, a significant portion of household spending went toward services. Once COVID-19 closures required many service industries to shutter their doors and shelter-in-place orders made staying home mandatory, consumer interest shifted to products.
Today, there are still COVID-related worries impacting the service economy, and it can also take time for consumer sentiments about this industry to shift. As a result, demand for goods isn’t declining at the desired rate.
When Is the Next Fed Rate Decision?
The Federal Reserve makes decisions about rates during meetings. The most recent meeting occurred over June 14 and 15, 2022, a gathering that led to the decision to increase rates by 0.75%. The next scheduled meeting is set to occur over July 26 and 27, 2022.
Traditionally, there are eight meetings held throughout the year. However, the Federal Reserve has the ability to meet outside those times should the need arise. This gives its members the ability to act swiftly to address economic concerns.
Will Federal Reserve Rates Go Up in July?
The chance that rates will increase again in July 2022 is high. Inflation remains an issue in the United States, and Federal Reserve members are anticipating approving a rate increase of 50 to 75 basis points (0.50 to 0.75%). However, the precise number won’t be clear until the meeting takes place. Statistics regarding inflation rates for June 2022 are key indicators regarding the health of the broader economy, supply and demand challenges, and similar factors the Federal Reserve will consider when making a decision.
Ultimately, the general goal is to achieve an inflation rate near 2%. This supports growth without the challenging impacts higher levels of inflation often carry with them. When inflation runs rampant, wages typically can’t keep up. In turn, this stresses household budgets and harms business profitability to the point of hindering operations and leading to other undesirable outcomes, like lost jobs.
Are the Rate Increases Enough, or Is a Recession Still Coming?
At this time, it isn’t clear whether the United States will enter a full recession. Figures from the June jobs report – which showed a gain of 372,000 jobs, more than initially expected – coupled with low unemployment are staving off some recession fears to a degree.
Wages are also up 5.1% year over year. While this is largely seen as a positive among households trying to navigate inflation, it also creates broader economic challenges. With wage increases, spending may not slow to the needed level. As a result, the Federal Reserve will likely continue with rate hikes.
Additionally, the jobs report showed that approximately 353,000 workers exited the labor force. This limits companies’ access to qualified employees, leaving far more open positions than available workers. This can hinder the supply of many goods and services, which can ultimately create conditions that accelerate inflation further.
Some analysts feel that the Federal Reserve acted far later than it should have to stem inflation. While the most restrictive aspects of the pandemic have been over for some time, the Federal Reserve didn’t raise rates until inflation began rearing its head.
Still, the United States isn’t formally in a recession. Ultimately, whether one will occur isn’t fully known, and it may not become clear until more inflation data becomes available and rate changes have a chance to make an impact.