Inflation has cooled and the Fed is pausing interest rate hikes – but changes in macroeconomic conditions could reverse this trend

Most of the Federal Reserve’s interest rate hikes may be in the rearview mirror. The question now: How many more do officials have left? After spending last year raising interest rates at a speed unmatched since the 1980s, Fed policymakers are taking a different approach in 2023: hiking interest rates at a slower and more deliberate pace. U.S. central bankers have raised interest rates by a quarter of a percentage point — the more traditional amount, at least historically speaking — at every meeting so far this year. The Fed’s benchmark rate is now in a target range of 5-5.25 percent, the highest in nearly 16 years. But those smaller moves haven’t been without bumps in the road — and staying focused on fighting inflation hasn’t been easy. Three major bank failures rocked financial markets throughout the first half of the year, creating stability concerns and amplifying fears of a full-fledged banking crisis. Experts say those bank failures are unlike what happened during the 2008 financial crisis but highlight just how many cracks in an otherwise-sound system can form when inflation — and interest rates — soar much higher and faster than anyone could’ve predicted. Fed officials are now signaling they might not hike rates much more, given uncertainty about the outlook. The majority of policymakers on the Federal Open Market Committee (FOMC) penciled in 5-5.25 percent as where interest rates will peak, suggesting the Fed could be about done raising rates. Fed Chair Jerome Powell, however, stopped short of committing to a pause, while other Fed officials aren’t so certain. How many more rate hikes the Fed has left depends on incoming data surrounding inflation and employment, as well as how much turmoil among regional banks could slow the economy. “We may not be far off,” Powell said at the May meeting press conference, referring to the Fed’s peak interest rate. “We’re possibly even at that level. … We will make that determination meeting by meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation.” The collapse of Silicon Valley Bank, Signature Bank and now First Republic earlier this month shows the Fed has new concerns to manage simultaneously: financial stability and price stability. Inflation is improving. Consumer prices rose 4.9 percent in April from a year ago — down more than 4 percentage points from its June peak of 9.1 percent. That’s still nearly two and a half times the Fed’s preferred 2 percent inflation target. Powell repeated in May that those hot prices are underscoring the need for monetary policy to remain tight.