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Will the Fed Raise Rates Again in December? What the Latest Inflation Data Tells Us

The Federal Reserve may finally slow its rate hike rollout in December.

Fed Chairman Jerome Powell in front of an American flag at a press briefing
US Federal Reserve Chair Jerome Powell is trying to rein in inflation.
Drew Angerer/Getty Images

This story is part of Recession Help Desk, CNET's coverage of how to make smart money moves in an uncertain economy.

Over the last year the Federal Reserve has been on a crusade to temper rising prices. From groceries to gas, inflation has been squeezing Americans over the last 12 months. In response, the Fed has remained aggressive in raising interest rates, its main countermeasure to try to lower rising prices. But rate hikes may finally start to slow in December, with inflation showing early signs of cooling. 

The latest Consumer Price Index, a key inflation report, showed that Inflation Slows Slightly in October, But Food and Gas Prices Remain High, rising 7.7% for all items over the last 12 months. For context, inflation's increase in September was 8.2%. 

The Fed has remained staunch in raising interest rates, with Fed Chairman Jerome Powell consistently saying that the Fed will ease rising interest rates only when the central bank sees significant progress on inflation. October's report may be just what the Fed is looking for, and it already indicated during its November meeting that it may slow the pace at which it raises interest rates in December.

Rate hikes are the Fed's main countermeasure against inflation. Historically, when interest rates rise, the high cost of borrowing helps to stall the economy, with fewer consumers taking on new credit accounts. This in turn helps to lower prices. But the current inflation we're experiencing is a little different than in decades past. Today, inflation remains high for many reasons, including the war in Ukraine, pandemic demand challenges and the supply chain's struggle to keep pace. Despite multiple rate increases, the Fed has not yet been able to get inflation under control.

Many worry that further increases to the cost of borrowing money could contract the economy too much, sending us into a recession: a shrinking, rather than growing, economy. The Fed acknowledges the adverse effects and potential risks of this restrictive monetary policy.

While a recession would cause pain to the economy and American workers, the Fed has indicated that allowing inflation to linger for too long poses a larger threat. Here's everything you need to know about record high inflation, rate hikes and what's next for the economy.

What's going on with inflation?

Inflation has been high throughout 2022, reaching a record-high of 9.1% year-over-year in June. Since then, the rate of inflation has dipped slightly overall -- in October, inflation stood at 7.7% over the previous year, according to the Bureau of Labor Statistics. High inflation levels have stemmed primarily from an increase in gas, food and housing prices. While the pace of inflation is slowing, prices are still rising across the board, whether you're talking about groceries or housing.

During periods of high inflation, your dollar has less purchasing power, making everything you buy more expensive, even though you're likely not getting paid more. In fact, more Americans are living paycheck to paycheck, and wages aren't keeping up with inflation rates. 

Why is inflation still so high?

Much of what we're seeing in the economy right now can be attributed to the pandemic. In March 2020, the onset of the COVID-19 pandemic caused the US economy to shut down. Millions of employees were laid off, many businesses had to close their doors and the global supply chain was abruptly put on pause. This caused the flow of goods produced and manufactured abroad and shipped to the US to cease for at least two weeks, and in many cases, for months, according to Pete Earle, an economist at the American Institute for Economic Research.

But the reduction in supply was met with increased demand as Americans started purchasing durable goods to replace the services they used prior to the pandemic, said Josh Bivens, director of research at the Economic Policy Institute. "The pandemic put distortions on both the demand and supply side of the US economy," Bivens said. 

Though the immediate impacts of COVID-19 on the US economy are easing, labor disruptions and supply-and-demand imbalances persist, including shortages in microchips, steel, equipment and other goods, causing ongoing slowdowns in manufacturing and construction. Unanticipated shocks to the global economy have made things worse -- particularly subsequent COVID-19 variants, lockdowns in China (which restrict the availability of goods in the US) and Russia's war on Ukraine (which is affecting gas and food prices), according to the World Bank.

Some lawmakers have also accused corporations of seizing on inflation as an excuse to increase prices more than necessary, a form of price gouging.

Why does the Federal Reserve keep raising rates?

With inflation hitting record highs, the Fed is under a great deal of pressure from policymakers and consumers to get the situation under control. One of the Fed's primary objectives is to promote price stability and maintain inflation at a rate of 2%. 

By raising interest rates, the Fed aims to slow down the economy by making borrowing more expensive. In turn, consumers, investors and businesses pause on making investments and purchases with credit, which leads to reduced economic demand, theoretically reeling in prices and balancing the scales of supply and demand. 

The Fed raised the federal funds rate by a quarter of a percentage point in March, followed by a half of a percentage point in May. It then raised rates by three-quarters of a percentage point in June, July, September and November.

The federal funds rate, which now sits at a range of 3.75% to 4%, is the interest rate that banks charge each other for borrowing and lending. And there's a trickle-down effect: When it costs banks more to borrow from one another, they offset it by raising rates on their consumer loan products. That's how the Fed effectively drives up interest rates in the US economy. 

However, hiking interest rates can only reduce inflationary pressures so much, especially when the current factors are largely on the supply side -- and are worldwide. A growing number of economists say that the situation is more complicated to get under control, and that the Fed's monetary policy alone is not enough.

Can we avoid a recession at this point? 

A recession is seeming more likely, and Powell himself has said it's likely we're headed towards a period of "below-trend growth." However, it's still unclear how these policy moves will broadly affect prices and wages.

Officially, the National Bureau of Economic Research calls a recession. By their definition, a recession is a "significant decline in economic activity that is spread across the economy and lasts more than a few months." That means a declining gross domestic product, or GDP, alongside diminishing production and retail sales, as well as shrinking incomes and lower employment. The first quarters of 2022 match this definition, but no official call has been made yet.

Will unemployment go up?

The unemployment rate in the US is expected to rise over the next year. Right now, unemployment sits at 3.5%, according to the BLS, but the Fed anticipates unemployment to hit 4.4% in 2023, as noted in its Summary of Economic Projections.

Historically, pushing rates too quickly can reduce consumer demand too much and unduly stifle economic growth, leading businesses to lay off workers or stop hiring. That often drives up unemployment, leading to another problem for the Fed, as it's also tasked with maintaining maximum employment. 

In a general sense, inflation and unemployment have an inverse relationship. When more people are working, they have the means to spend, leading to an increase in demand and elevated prices. However, when inflation is low, joblessness tends to be higher. But with prices remaining sky-high, many investors are increasingly worried about a coming period of stagflation, the toxic combination of slow economic growth with high unemployment and inflation. 

Here's what higher interest rates mean for you

Raising interest rates means buying a car or a home is more expensive, since you'll pay more in interest. Higher rates could make it more expensive to refinance your mortgage or student loans. Moreover, the Fed hikes will drive up interest rates on credit cards, meaning that your debt on outstanding balances will go up. 

Securities and crypto markets can also be negatively impacted by the Fed's decisions to raise rates. When interest rates go up, money is more expensive to borrow, leading to less liquidity in both the crypto and stock markets. Investor psychology can also cause markets to slide, as cautious investors may move their money out of stocks or crypto into more conservative investments, such as government bonds.

On the flip side, rising interest rates could mean a slightly better return on your savings accounts. Interest rates on savings deposits are directly affected by the federal funds rate. Several banks have already increased annual percentage yields, or APYs, on their savings accounts and certificates of deposit in the wake of the Fed's rate hikes.