The journey to 5% interest

The US Federal Reserve raised interest rates by 75 percentage points, bringing its benchmark rate range to 3.75%-4% and effectively making any type of debt (mortgages, credit cards, auto) a little bit pricier.

Why it matters: Today marks a shift in the Fed’s strategy seen over the last seven months, which will increasingly focus on balancing the need to combat still-high inflation against the strains of higher borrowing costs (and the risks to the economy that follow).

  • Some experts say the central bank is likely to start slowing its aggressive rate hike roll as it waits to assess the impact of higher rates on the economy (some data already indicates price pressures are beginning to ease).
  • But strong finances for households and businesses have so far made taming high inflation particularly difficult, as the labour market and consumer spending hold up. 

What they’re saying: "It will be some time before [Inflationary pressures stemming from the labour market] are sufficiently tepid for the Fed," one Wells Fargo economist told Reuters. 

  • Goldman Sachs CEO David Solomon noted that rates as high as 5% could play out by March 2023 if the Fed does not see “real changes in [consumer] behaviour.”

Zoom out: The Bank of Canada already slowed the pace of its rate hikes last month, but our dependence on the US economy means it’s (more or less) forced to match the Fed’s moves.