The Federal Reserve on Wednesday paused its inflation-fighting campaign by holding its benchmark interest rate steady.
Though the Fed kept its powder dry at its June meeting, the battle might not yet be over as it signaled the pause could be temporary with two more increases possible this year. Here are four things to know about the Fed’s efforts to tame prices:
1. Inflation easing
The prices of goods began climbing in mid-2020, as the economy started its recovery from the first body blows of the pandemic and the massive emergency spending by the government began flowing to consumers and companies. Inflation kept rising, partly because of continued snarls in supply chains, as consumers steadily returned to more normal routines.
By late 2021, the Consumer Price Index — the commonly used measure of inflation — showed prices rising an average of 7% a year and the Federal Reserve began talking about a rate-hike campaign to slow the economy and make borrowing more costly. A few months later, the Fed raised rates aggressively even as the CPI kept rising.
By last summer, the index was above 9%, but it’s been declining since then.
Earlier this week, the government reported the CPI was below 5%. That is still more than twice as high as the Fed’s target, but there’s always a lag before rate hikes have their impact and many economists fear continued increases could cause a recession.
“While the Fed’s battle against inflation is not yet won, there’s sufficient progress to warrant a wait-and-see approach,” said Jeffrey Korzenik, chief economist of Fifth Third Commercial Bank
2. For consumers
The Fed sets interest rates directly only for the largest banks borrowing from the government, but those changes are passed along the line to their borrowers and eventually to consumers. Higher Fed rates typically translate to higher interest on credit cards, auto loans and mortgages.
Delinquency rates on credit cards are far below the levels hit during the Great Recession, but they have climbed 71% since mid-2021, according to the Fed.
It’s visible to lenders here, said Katherine Saez, Georgia region president for Truist. “We are becoming a little more concerned about the tightening of economic conditions. We are starting to see credit card balances ramp up.”
Two years ago, the average interest on a 30-year mortgage was less than 3%. It is now 6.71%, according to the Federal Home Loan Mortgage Corp.
That sudden rise sent a chill through the housing market, but both buyers and sellers are slowly adapting. A Fed pause makes it more likely that the market can adjust to that new normal.
3. For workers
As the economy rebounded from the pandemic, job growth surged and wages rose rapidly as companies scrambled to fill openings. Many traditional economists blamed worker raises, along with government spending, for inflation.
Pessimists feared — and many inflation hawks hoped — that the Fed hikes would croak job growth and reverse pay increases.
Yet hiring has continued. Since the Fed started talking about raising rates, Georgia has added 195,100 jobs and the U.S. has added 6.4 million positions.
“The economy continues to show resiliency,” said economist Korzenik. “But that job growth masks underlying weakness.”
Tech layoffs got the headlines over the past few months as Amazon, Facebook, Microsoft and others cut jobs. But hiring in some other sectors has slowed, even if there haven’t been cuts.
And wage growth has slowed, said economist Daniel Zhao of online job site Glassdoor, decelerating to 4.3% in May from a high of nearly 6% last year.
4. For companies
When it comes to economic growth, loans are fuel. Companies — especially younger, smaller firms — that want to expand often do not enough cash coming in from their current business to afford what they want. So to build new facilities, buy equipment or hire more employees, they borrow money.
The higher the interest rate they pay for the loan, the more they need a better and quicker profit on the investment. If they are not sure that the return will pay for the loan, they just may postpone their plans.
That slows job growth — or leads to layoffs.
Through most of the Fed’s campaign, companies have stubbornly kept borrowing, spending and expanding. Some still are. But more companies are holding back.
“What has changed are the borrowing costs of our clients,” said Saez at Truist. “The cost of capital for their funding. We are starting to see some of them — I wouldn’t say ‘struggle’ — but they have become more thoughtful on how they are borrowing.”
Federal benchmark rate
Dec. 2021: 0.08%
Current: 5.06%
Inflation*, year over year
Dec. 2021: 7.19%
Peak: 8.93% (Jan. 2022)
Current: 4.13%
Job growth since Dec. 2021
Georgia: 195,100
United States: 6.36 million
Average hourly earnings increase per year
Peak: 5.9% (March 2022)
Current: 4.3%
Unemployment rate, April
United States: 3.4%
Georgia: 3.1%
Unemployment rate, May
United States: 3.7%
Georgia: will be announced Thursday
*Consumer Price Index, all items
Sources: Federal Reserve, Bureau of Labor Statistics, Georgia Department of Labor
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