Fed Decision Day: How High Will Rates Go?

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What's Happening Today

Happy Fed Day! Today we find out how aggressive the Federal Reserve will decide to be in its fight against inflation. Yesterday gave everyone a small dose of optimism when the Consumer Price Index (CPI)—an important gauge of inflation—showed that the annual rate of inflation in November came down to 7.1% from 7.7% in October, and was lower than the 7.3% that economists expected. While the CPI isn't the Fed's preferred inflation gauge, the number still shows that price growth on goods and services has slowed, making it more likely that the central bank will be a little more moderate in its rate hike decision.

Anyone looking for a loan will likely welcome a smaller rate hike, since it means interest rates on mortgages, credit card debt, and more won't go as high as they would have with another jumbo-sized hike of 75 basis points. While higher mortgage rates have put pressure on the real estate market and caused home prices to drop a little, they still remain elevated compared to last year.

The decision comes this afternoon, and Fed Chair Jerome Powell will give prepared remarks and answer questions from reporters. Investors will be paying close attention to what the Fed Chair says as they also look ahead to what they can expect from the banking regulator next year.

While markets, at roughly 80% certainty, are expecting a hike of 50 basis points, worries about a potential recession remain. Higher rates tend to slow down economic activity and if the Fed continues to hike rates aggressively, it could tip the economy into a recession.

Stocks are on the rise today as investors await the Fed decision at 2:30 p.m. ET.

- Kristin

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Term of the Day

Interest Rate Ceiling

An interest rate ceiling limits the amount of interest a lender can increase. It is defined within the loan contract terms and prevents rates from rising above a specified amount.

Interest rate ceilings aim to protect consumers and prohibit abusive lending practices. The concept of interest rate ceilings stems from ancient usury laws, which were made to protect consumers from extremely high interest rates.

Except for regulations for federal credit unions, there are no federal interest rate cap laws. Instead, each state has its own set of usury laws that set the legal maximum interest rate a lender can charge. As a result, the limits vary by state, and the maximum amount of interest you can be charged may depend on where the lender is located, not the state in which you live.

Off the Charts

In November, the Federal Reserve had announced that it would raise interest rates by 75 basis points, shifting the target range to 3.75%-4%. During the Covid-19 pandemic, the interest rate was kept at a near-zero range but has risen sharply in response to surging inflation.