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The Fed Is Likely to Pause Rate Hikes, Despite Inflation Growth

But that doesn’t mean rate hikes are over, either.

LD / Getty Images

The next Federal Open Market Committee meeting is just days away. 

After a series of rate hikes, with one brief pause in June, all eyes are on whether the Federal Reserve will hike rates again to keep chipping away at inflation. Today’s Consumer Price Index report showed inflation rising 0.6% month over month in August.

Fed Chair Jerome Powell has made it clear that the central bank’s job isn’t done yet.

“Although inflation has moved down from its peak -- a welcome development -- it remains too high,” Powell said in his remarks last month. “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.” 

Financial experts and economists say it’s likely that the central bank will hold rates steady this month, but that doesn’t mean it’s the end of rate hikes this year. Whatever happens, the Fed’s monetary policy can have a big impact on your wallet. 

The Fed could pause raising rates this month

The current federal funds rate range now sits at 5.25% to 5.50%. In March of last year, it was 0.25% to 0.50%. Higher interest rates affect spending, borrowing, investing and the housing and bond markets. 

There’s a chance that the Fed could “skip” rate hikes this month, said Shmuel Shayowitz, chief lending officer at Approved Funding. When the Fed pauses, or “skips,” a rate hike, it’s another way of saying that it reserves the right to take necessary steps in the future depending on market conditions, according to Shayowitz. 

Inflation is now at 3.7% year over year, which is still above the Fed’s target rate of 2%. Fed officials will be reviewing the data regularly to see if rate hikes are necessary to bring annual price growth down to that level. 

Holding rates steady this month gives the Fed more time to carefully decide what happens next. 

“If they overshoot, then we are thrown into a mild recession,” said Phillip Sprehe, an economist at Geographic Solutions. But if the Fed presses pause this month, it might achieve what’s called a “soft landing,” which would slow the economy just enough and avoid the consequences of a severe economic downturn. “However, if they underestimate inflation, it will lead to a resurgence in prices that surpass wage gains and ultimately result in job loss and wage erosion,” Sprehe said.

More official reports measuring inflation and unemployment will be released between next week’s FOMC and the subsequent Fed meeting in November. But that still might not be enough to data for the central bank to determine where rates will go next. Lowering inflation will take time, and keeping the economy in balance means looking at the bigger picture over the long term. 

What the rate hike pause could mean for you

Higher interest rates generally lead to higher returns on savings and certificates of deposit. But as interest rates move up, borrowing also becomes more expensive, and that affects everything from credit card debt to mortgages. 

If you’ve yet to take advantage of high-interest earning accounts, there’s still an opportunity to pin down a rate between 4% and 5%. Experts don’t expect the yields for CDs and savings accounts to go down immediately, but don’t wait for them to go up significantly in the coming months either. 

If the Fed chooses to hold rates constant, rates on savings products probably won’t change that much, said Jacob Channel, senior economist at LendingTree. “In the longer term, they may continue to remain steady or rise depending on what happens in Fed meetings later this year,” he said.

CD and savings rates might start to fall in the second quarter of next year, said Sonu Varghese, a global macro strategist at Carson Wealth. However, every bank and financial institution can adjust deposit rates based on their needs, so it’s best to shop around for the best yield. 

Remember that a rate pause isn’t the same as an actual rate cut, so borrowing costs will remain high for a while. If you’re planning to buy a home, car or apply for a personal loan, you’ll still be paying more in interest than you did a few years ago.

Dashia is a staff writer for CNET Money who covers all angles of personal finance, including credit cards and banking. From reviews to news coverage, she aims to help readers make more informed decisions about their money. Dashia was previously a staff writer at NextAdvisor, where she covered credit cards, taxes, banking B2B payments. She has also written about safety, home automation, technology and fintech.