Fed and Interest Rates

The Fed raised rates last year at the fastest pace in history. There were seven total increases: 0.25% in March, 0.50% in May, 0.75% in June, 0.75% in July, 0.75% in September, 0.75% in November, and 0.50% in December.

Interest rates are commonly referred to as "the Fed's domain." While the Fed does play an active role in setting interest rates, the reality is a bit more complex. Interest rates are ultimately determined by the market, and the Fed has limitations when it comes to its power over long-term rates.

The Fed controls the Fed Fund Rate: the rate at which banks lend money to each other overnight, and it serves as a benchmark for other interest rates in the economy. The Fed uses this rate as a tool to influence the economy by making borrowing cheaper or more expensive. But long-term rates like the 10-Year Treasury and 30-year fixed-rate mortgages often move independently of the Fed.

The 10-Year Treasury, for example, dropped as low as 3.37% this week after hitting a high of 4.25% in October. Despite predictions that mortgage rates would climb as high as 10%, mortgage rates have fallen over 1% since October. Predictions were based on the Fed rather than inflation and the economic outlook.

According to the producer price index, which measures the prices of wholesale goods across multiple sectors, wholesale prices decreased in December. This is another sign that inflation is beginning to ease. If inflation is coming down and the economy is slowing, long-term rates will generally fall.

So, what does this mean for you? While the Fed plays a significant role in setting interest rates, it is ultimately the market that determines them. In other words, interest rates can fluctuate based on a variety of factors, not just the Fed. The impact of inflation, economic growth, and global events also plays a role. So, while you should watch the Fed's actions, it's also wise to watch the bigger picture when it comes to the economy.

 

 

 

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