Summary

After pausing last month in its ongoing series of rate increases, the Federal Reserve Board today bumped up its benchmark interest rate, the fed funds rate, by .25% to a range of 5.25% to 5.50%—a 22-year high. The Fed left the door open for another rate increase this year, depending on what happens with inflation and other developments in the economy and markets.

The Upshot

• June data showed inflation at its lowest rate since March 2021, with core CPI rising 4.8% over the prior year.
• Nonetheless, the Federal Open Market Committee (FOMC) said a rate hike was needed to eventually bring inflation within the central bank’s target rate of 2%.
• The Fed had raised rates 10 times in a row since March 2022 before skipping a hike in June.
• Some analysts believe the Fed has hit its peak rate, but others predict another quarter-point hike before the end of 2023.

The Bottom Line

The ongoing series of rate hikes has helped dampen inflation and provided some relief to consumers, but the higher rates continue to drive up borrowing costs, curtail capital and business expansion, and result in more distressed assets, transactions, and financings.

The Federal Reserve Board today raised its benchmark interest rate, the fed funds rate, by .25% to a range of 5.25% to 5.50%—a 22-year high. The Fed left the door open for another rate increase this year and said inflation as well developments within the economy and markets will determine “the extent of additional policy firming that may be appropriate to return inflation to 2% over time.”

“The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments,” the Fed said in a statement after today’s announcement.

The Fed’s Open Market Committee (FOMC) had raised rates on 10 consecutive opportunities starting in March 2022 before skipping an increase at June’s meeting. The ongoing series of rate hikes has helped dampen inflation and provided some relief to consumers. June data showed inflation at its lowest rate since March 2021, with core CPI rising 4.8% over the prior year.

Nonetheless, the FOMC said a rate hike was needed to eventually bring inflation within the central bank’s target rate of 2%. Fed officials have said that recent data indicates that “the banking turmoil (collapse of three large banks earlier this year) is not going to result in a significant problem for the economy” and provides “no reason” not to raise interest rates to curb inflation.

Additionally, the labor market—a focal point for Chair Powell— remains tight, with unemployment near historic lows and down slightly in the latest report from June from the U.S. Bureau of Labor Statistics.

The interest rate hikes have taken their toll on the economy. Higher rates over the past 15 months continue to drive up borrowing costs, curtail capital and business expansion, and result in more distressed assets, transactions, and financings. The number of corporate debt defaults in 2023 has already surged well above the total for all of last year. Moody’s Investors Service predicts global corporate defaults to continue rising, from 3.8% in June to 4.7% by the end of the year and 5% next year. While these higher default rates indicate trouble in the economy, they could provide opportunities for acquisition of distressed assets at bargain prices.

Commercial real estate values have also taken a hit: Since the March 2022 peak, the pricing of institutional-quality commercial real estate is down 16%, according to the Greenstreet Commercial Property Price Index, with office values down more than 30%.

Economists and business leaders are divided on predictions whether the Fed will institute another rate increase this year. Some believe the Fed has hit its peak rate, but others predict another quarter-point hike before the end of 2023.

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