Federal Reserve Chair Says Interest Rate Hikes Will Slow Down

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  • After months of aggressive interest rate hikes, the Fed may be ready to slow that practice.
  • That could give consumers relief from higher borrowing costs and help prevent a recession.

That's really good news for a couple of reasons.

For well over a year, consumers have been grappling with sky-high levels of inflation. That's forced many people to raid their savings accounts and rack up debt on their credit cards just to keep up with their essential bills.

The Federal Reserve has been doing its best to slow inflation. To that end, it's been implementing aggressive interest rate hikes in the hopes of making it more expensive for consumers to borrow money.

Why is that important? The costlier it is to borrow, the less inclined consumers might be to spend money. And once consumer spending slows down, it could help close the gap between supply and demand that caused inflation to surge in the first place.

Of course, the Fed's interest rate policies also have negative repercussions. For one thing, they've already made borrowing more expensive, whether in the form of a personal loan, auto loan, or mortgage. And also, if higher borrowing costs prompt consumers to cut back on spending to an extreme degree, it could be enough to fuel a recession.

In fact, financial experts have been warning for months that a recession could hit in 2023 due to those aggressive rate hikes. But on Nov. 30, Federal Reserve Chair Jerome Powell confirmed that the central bank is actually planning to slow the pace of its rate hikes. And that could end up benefiting consumers in more ways than one.

Relief from rising costs

The Federal Reserve doesn't directly set consumer borrowing rates, like personal loan and mortgage rates. Rather, it sets the federal funds rate, which is what banks charge one another for short-term borrowing purposes.

But when the federal funds rate increases, it indirectly drives up the cost of consumer borrowing. If the Fed decides to slow down on rate hikes, it could pave the way to more affordable borrowing at some point in 2023.

Avoiding a recession

If borrowing costs don't continue to rise at a rapid clip, consumer spending may end up holding steady. And that could be enough to prevent a near-term recession.

Plus, when the general economic outlook is positive, not negative, it can impact consumer behavior. So the fact that the Fed is announcing a slowdown in rate hikes might be enough to drive consumer spending upward.

At this point, a lot of people still have extra money on hand thanks to the stimulus packages lawmakers rolled out during the pandemic. Those people may be more inclined to spend their money rather than save it if they're not worried about economic conditions deteriorating in 2023.

Progress still needs to be made

While it's great to hear that the Fed plans to get less aggressive with its rate hikes in the coming months, the reality is that modest rate hikes are still on the table, and for good reason. The problem of inflation is far from over. Consumers are still being forced to spend more money on everything from transportation to food to utilities. And until inflation cools off, borrowers should expect to face higher costs than they did previously.

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