Fed Prepares to Slow Rate Hikes at February Meeting

The Federal Reserve is preparing to slow its rate hikes from a 50 basis point increase in December to 25 basis points for the meeting on January 31 and February 1. The central bank is looking to get inflation under control with further debate centering on when to pause rate hikes. This comes after inflation slowed down and Fed Vice Chair Lael Brainard stated that policy needs to be “sufficiently restrictive” to bring inflation back to 2 percent on a sustained basis.[0]

Economist Mohamed El-Erian believes that the Fed should raise the benchmark rate by 50 basis points as inflation is likely to be sticky at 4 percent by mid-year.[1] Investors largely expect the Federal Open Market Committee to raise the Fed funds rate by 25 basis points, which is what is currently priced in the CME FedWatch tool.[1]

The Fed downshifted its rate hike pace in December after inflation eased from multiyear highs. The current Fed funds rate stands at 4.25%-4.5%.[1] El-Erian notes that there are arguments for and against the Fed moving to 25 basis points, making the February meeting a “tricky one” for policymakers.[1]

High-yield savings accounts tend to offer much better interest rates than traditional savings accounts, often as high as 4%.[2] Compared to traditional brick and mortar banks, online banks usually provide much higher annual percentage yields (APY) due to the absence of overhead costs.[2]

It is possible that the Federal Reserve’s rate pause will not last long, however, the reasons for its end may not be desired by investors.[3] If the U.S. economy speeds up, or if inflation does not decrease as much as anticipated in the coming months, policymakers may decide that further rate increases are necessary to slow the economy down.[3]

It will be interesting to see what the Fed decides at their February meeting, as the central bank attempts to balance inflation and wage growth with their monetary policy. If they are successful, they might be able to pause rate hikes and let the market benefit from a period of stability.

0. “Fed set to slow down on rate hikes again and debate how much further to go” Moneycontrol, 21 Jan. 2023, https://www.moneycontrol.com/news/business/economy/fed-set-to-slow-down-on-rate-hikes-again-and-debate-how-much-further-to-go-9908071.html

1. “The Fed should raise rates by more than markets anticipate in February as inflation will likely be sticky thro” Business Insider India, 23 Jan. 2023, https://www.businessinsider.in/stock-market/news/the-fed-should-raise-rates-by-more-than-markets-anticipate-in-february-as-inflation-will-likely-be-sticky-through-mid-year-mohamed-el-erian-says/articleshow/97257677.cms

2. “Next Fed rate hike: How will it affect savings account interest rates?” SFGATE, 26 Jan. 2023, https://www.sfgate.com/realestate/article/fed-interest-rate-hike-17741802.php

3. “Preview of the Fed meeting: Brace for smaller rate hikes as inflation begins to slow” Yahoo! Voices, 25 Jan. 2023, https://www.yahoo.com/now/preview-fed-meeting-brace-smaller-200011724.html