The Fed Hikes Interest Rates To Highest Level In 22 Years

What just happened?

Well, the Federal Reserve (you know… the Fed) has cranked up interest rates again after a one-time pause last meeting: this time by a quarter percentage point (that's 25 basis points). And that lands the key fed funds rate between 5.25-5.5%, a high not seen in over two decades.

It’s a big deal, but the news itself was as predictable as a sitcom punchline. The bets placed in Wall Street’s version of a bookie’s odds – these are what’s known as “futures contracts” – predicted this move with more than 99% certainty.

And the meeting seemed like it could’ve given paint drying a run for its money in terms of excitement. The central bank’s voting members were unanimous in the decision, with no dissenters. And despite leaving a small window cracked for even more hikes in the future – and upgrading their view of economic growth from "modest" to "moderate" – their collective statement was nothing we haven’t seen before. Even the press conference was a snoozefest.

What does it mean?

The Fed’s juggling a complex balancing act: its main gig is to keep inflation in check without messing up too much with people’s jobs and wallets. So the fact that the Fed hiked and left the door open for further hikes reflects the policymakers’ confidence that the economy’s still too hot, and needs a bit more of a cold shower. In fact, it shows that they're more worried about inflation sticking around too long or spiraling out of control again (like in the ‘70s) than they are about a little economic bruising.

Now sure, a little heat is good. And a robust economy is something to cheer about. But it also brings a couple of quirks. A rip-roaring economy could mean our good old friend inflation might have a hard time cooling to its cozy 2% target and may suggest that interest rates might have to stick to these lofty levels or – yikes – climb even higher. That could become problematic: interest hikes are tricky – they're slow-acting medicine and that makes it hard for the Fed to know how much to administer. Plus, there’s such a thing as rates too high: the higher the rates (and the faster the ascent), the more strain it puts on the financial system and the greater the chance that the economy gets an unpleasant surprise further down the line. In plain English: the tightrope gets more wobbly with each rate hike. It’s no wonder, then, that investors are predicting that the Fed will cut rates in 2024.

So what next?

For now, things are mostly peachy – which is frankly astonishing given the Fed has bumped rates up from near zero to above 5% in just over a year. And the central bank may well pull off a soft landing – that dream scenario where its interest rate hikes send inflation back toward the 2% target without plunging the economy into a recession – but it’s still a tad early for a victory lap. The big question now isn't whether the Fed will nudge rates up again at the next meeting in September (the bookie’s odds are even on that), but how long the economy can keep rolling with the punches. Until now, it’s been a slow, steady grind. But we may have witnessed the easy part of inflation's descent, and the full impact of the rate hikes may not have fully landed yet. Fingers crossed that things stay on the up and the economy stays resilient, but remember: it's when everything goes quiet that you should amp up the vigilance. So keep your eyes peeled and your guard up.