The Federal Reserve just raised the target Federal Funds rate to 5.00 - 5.25%. The Federal Funds rate is the range at which the Federal Open Market Committee (FOMC) would like banks to lend and borrow money overnight, shaping the rate at which banks borrow from each other. By adjusting the rate, the Fed influences borrowing costs. Banks, in return, adjust their rates to consumers who save and borrow with them.
As the Federal Funds rate rises, borrowing becomes more expensive for businesses and households, placing downward pressure on demand for goods from cars to homes. The Fed continues to hike the Fed Funds rate to "return inflation to 2 percent over time.” Year-over-year changes to Core CPI started to decline in October of 2022.
The Federal Funds rate sits close to its historical 50-year median of 4.95%. Core CPI is elevated above its historical 50-year median of 3.0%. However, current inflation figures remain well-below peaks in 1980 of over 13% year-over-year.
After its March meeting, the Fed released its Summary of Economic Projections, which surveys FOMC members' expectations of future monetary policy. Median future target levels for the Federal Funds rate show the Fed Fund rate peaking at its current level in 2023 – and declining in 2024 and 2025.
The Fed will continue to monitor inflation, consumer demand, and economic data releases to set its rate policy.
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