Why the Fed raised interest rates by the smallest amount since it began its epic inflation fight

Rates on shorter-term borrowing are unlikely to come down, but if markets are right, they probably won’t increase much more.

However, for long-term borrowing costs, as on a 30-year mortgage, rates are already coming down and are likely to fall some more – good news for homebuyers.

Overall, yes, inflation is already starting to come down – and prices on some items are even falling.

For example, used-car prices, which soared earlier in the COVID-19 pandemic, have dropped in recent months, while prices of dozens of other items, such as flour, clothes and gasoline, have eased.

However, some costs continue to increase. Egg prices soared after the supply was disrupted because of avian flu, which killed off nearly 53 million egg-laying hens. Unfortunately, increasing interest rates will not bring back those birds or help decrease the cost of eggs.

In addition, nothing the Fed does will affect the war in Ukraine, which has led to higher world wheat and energy prices.

The point being, the Fed can’t really address certain types of inflation.

That’s the trillion-dollar question.

Fed officials have at times sounded hopeful that they can bring down inflation without crashing the economy – a so-called soft landing. During his press conference after the latest announcement Feb. 1, 2023, Fed Chair Jerome Powell was more cautious, saying it’s too soon to declare victory. But he noted: “We can now say for the first time that the disinflationary process has started.”

Economic forecasters have been less confident that the U.S. will avoid a recession. On average, economists surveyed this past month by The Wall Street Journal forecast a 61% probability of a recession in 2023. In addition, key economic indicators point to a recession, while the yield curve – a bond market metric that has been successful at predicting recessions – currently puts the odds at about 47%.

In my view, this all adds up to: Nobody really knows. My best advice to consumers out there is to prepare financially for a recession, but let’s not give up hope that the Fed can slow the economy without crashing it.

This article is republished from The Conversation, an independent nonprofit news site dedicated to sharing ideas from academic experts. The Conversation is trustworthy news from experts, from an independent nonprofit. Try our free newsletters.

William Chittenden does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.