According to experts consulted by VERIFY, the Federal Reserve can raise interest rates as many times as necessary to assist in resolving difficulties facing the U.S. economy, such as inflation.
On Wednesday, the Federal Reserve is likely to increase its target interest rate by an additional three-quarters of a percentage point, putting it to a range of 3% to 3.25% — the highest level in 14 years.
This will be the fifth time in 2022 that the Federal Reserve will adjust interest rates.
A VERIFY reader recently contacted the team to inquire whether there is an annual cap on the number of times the Federal Reserve can hike interest rates.
WHAT WE Observed
When people discuss the Fed altering interest rates, they are talking to the Federal Open Market Committee’s federal funds rate (FOMC). Simply said, this is the interest rate charged by banks to borrow or lend money overnight.
Sarah Foster, an economy reporter for Bankrate, explains that although this interest rate does not directly effect the ordinary American’s day-to-day purchases, changes to it affect everything from car and home loans to credit card purchases.
According to Ed Knotek, senior vice president and associate research director at the Federal Reserve Bank of Cleveland, there is no limit to the number of times the Federal Reserve, the central bank of the United States, can change its benchmark interest rate during a year.
Alan Gin, an economics professor at the University of San Diego’s Knauss School of Business, explained to VERIFY that the Fed is “tasked with doing what it believes is best to handle the difficulties facing the economy.”
“Therefore, there is no limit on the number of times they can change interest rates or the magnitude of each move,” he stated.
The Federal Reserve Act of 1913 charges the Fed with pursuing the economic objectives of maximum employment and price stability.
The Federal Reserve defines price stability as an average inflation rate of 2%. Maximum employment, which is also referred to as “full employment,” cannot be measured formally, but researchers at the Brookings Institution describe it as “the highest level of employment the economy can support without creating undesirable inflation.”
The statute provides the Federal Reserve with “considerable flexibility,” according to David Wessel, director of the Hutchins Center for Fiscal and Monetary Policy at the Brookings Institution. He said that this is because the Fed can respond promptly to economic developments such as the 1987 stock market meltdown, the 2007-2009 economic crisis, and the COVID-19 pandemic.
The FOMC meets eight times per year on average. But it can also make changes to the Fed’s benchmark interest rate outside of regular meetings, as it did in March 2020 when it dropped rates to encourage spending during the pandemic, as noted by Knotek.
What does this entail for your bank account? While the Federal Reserve does not directly set interest rates for home and auto loans, experts say its actions have a direct impact on them.
“The Federal Reserve is hiking interest rates to combat inflation. The government is attempting to slow the economy because excessive economic activity puts upward pressure on prices, Gin explained. “Higher interest rates will hinder the housing market by increasing the cost of purchasing a home. It will also reduce commercial activity by increasing the cost of borrowing for companies.”
Higher rates make borrowing money more expensive, which reduces demand for commodities in an effort to curb inflation.
Gin says it’s likely that rates would rise by a another 1.5 to 2% by the end of 2022, but he doesn’t anticipate significant hikes in 2023.