Even after raising interest rates to the highest since 2001, the Federal Reserve still isn’t ready to call it quits on its fiercest inflation fight in four decades.

But the higher rates climb, the harder the decision becomes.

Policymakers on the rate-setting Federal Open Market Committee (FOMC) raised interest rates another quarter point in July to a new target range of 5.25-5.5 percent, a decision that marks the 11th increase in 12 meetings.

Fed officials are seeing some progress at stabilizing prices, but the news isn’t all good. Inflation in June rose 3 percent from a year ago, the slowest pace since August 2021. Yet, the overall measure masks how sticky other price increases still are. Some key household items — like car repair services, bread and pet food — are still climbing at a double-digit pace. Rent prices and the cost of dining out at restaurants continue to blow past the Fed’s 2 percent price target. Taken together, inflation excluding food and energy is up 4.8 percent from a year ago.

Fed Chair Jerome Powell has said households experience food and energy inflation most, but those so-called “core” prices tend to indicate the overall trend of where inflation ends up. Another major concern is, shocks that exacerbate food and energy inflation again can come out of nowhere.

One example: Data from AAA shows gas prices jumped almost 4 percent between the third and fourth week of July alone, amid shutdowns at an oil refinery plant. Wheat prices also hit a five-month high after Russia targeted a key Ukraine port.

Whether the Fed continues raising interest rates this Fall will depend on whether core inflation makes notable progress toward the 2 percent target in the coming months. — Greg McBride, CFA, Bankrate Chief Financial Analyst

Experts say the risks of pulling back too soon and kickstarting another vicious inflation spiral remain higher than the risks of doing too much — even if the Fed has so far been able to raise interest rates a whopping 525 basis points in just 16 months without harming the job market.

It means officials aren’t ready to commit to their next moves. Policymakers still have one more rate increase on the table, judged by the median projection among officials in June. But that was before a Department of Labor report showed job growth fell to the slowest pace since the pandemic and the unemployment rate fell — renewing hopes of a soft landing. Investors’ optimism has been rejuvenated, loosening financial conditions, while consumer spending helped drive the U.S. economy to grow 2.4 percent in the second quarter of 2023, according to data from the Department of Commerce.

Officials will have two more glimpses at what’s going on with hiring and inflation before the next meeting in September.

“All of that information is going to inform our decision as we go into that meeting,” Powell said at the Fed’s July post-meeting press conference. “It is certainly possible that we would raise [rates] again at the September meeting, if the data warranted. And I would also say it’s possible that we would choose to hold steady at that meeting.”

Economists’ average forecast in Bankrate’s second-quarter Economic Indicator poll estimate that the Fed will follow through with one more rate hike, with the federal funds rate peaking in a target range of 5.5-5.75 percent. Investors, however, still predominantly assume the Fed is done, according to data from CME Group’s FedWatch tool.

Officials have three more meetings left this year between September and December.

“It’s important for the Fed at the moment to have all the options on the table,” says Tuan Nguyen, an economist at RSM. “All of those meetings will be live, meaning the Fed will have the options of whether to pause or hike.”

Fed’s future moves depend on inflation, employment — and banking stress

Inflation would drive the Fed’s decision to keep raising rates.

Back in June, Fed officials massively upgraded their expectations for the economy. The median estimate among officials calls for a 3.9 percent core inflation rate, as measured by the Department of Commerce’s personal consumption expenditures index. That’s up from a 3.6 percent projection just last March.

The U.S. economy has remained much more resilient than experts had expected when the Fed first started raising rates. Joblessness is still at a near half-century low of 3.6 percent, the same level it was back in March 2022 when the Fed first started raising interest rates. Employers have also created a healthy 200,000 new jobs or more each month since December 2020.

That strong job market is helping to buoy consumer spending, giving consumers the continued buying power. Meanwhile, wage growth has been eclipsing inflation since May.

Back in June, Fed officials projected that joblessness wouldn’t peak as high this year, hitting 4.1 percent after a 4.5 percent estimate from three months ago.

Even the housing market is beginning to reverse course. Home prices grew for the fourth month in a row after falling for seven consecutive months, according to the Case-Shiller Home Price Index. Often considered the largest line item in a household’s budget and currently contributing most to inflation, shelter prices have been assumed to soon begin rolling over. The Fed may have to reevaluate its inflation estimates — and subsequently, its path for raising rates — if the expected slowdown never comes to fruition.

Policymakers upgraded the description of the economy’s performance from “modest” to “moderate” in their post-meeting statement.

And in a new revelation, Powell also said the Fed staffers who brief officials on their economic outlook are no longer forecasting the recession that they had been penciling in for later this year since March.

Fed staffers research the economy and deliver a prepared analysis to policymakers during Fed meetings to help guide their rate decisions. Powell, however, had been pushing back on those estimates, reiterating that a recession was still not his base case.

“I continue to think that it’s possible that this time is really different,” Powell said in May, referring to previous instances of the Fed engineering a recession by tightening too much. “It wasn’t supposed to be possible for job openings to decline by as much as they’ve declined without unemployment going up. Well, that’s what we’ve seen.”

All but two Fed officials, meanwhile, noted a high degree of uncertainty about their inflation projections. The majority noted that risks for both core and headline inflation are weighted to the upside — suggesting prices could rise even higher from here.

“They may or may not be right with that risk assessment, but it tells you a lot about where they’re willing to air,” says Kathy Bostjancic, chief economist at Nationwide. “They’re willing to err on the side of higher interest rates because of the risk of inflation being higher.”

Markets fear that defeating inflation means starting a recession

Some of the key drivers of inflation — wage growth and consumption — dip when the economy enters a recession. That’s exactly what investors have been bracing for over the past year, to no avail.

Long seen as a Wall Street recession indicator, the 10-year Treasury yield has been trading below the 2-year rate since early July 2022.

Part of the anxiety about inflation all along has been that a downturn is inflation’s only cure, likely informed by markets’ bad experiences during the stagflationary-era of the 1970s and early 1980s.

The Fed also doesn’t have a good track record at getting higher rates right.

“Not only is it a concern, but the odds favor it,” McBride says, referring to a recession. “Look at the last three [tightening] cycles: Two of them ended in recessions, and the one that didn’t was an economic slowdown, where they had to reverse course and start cutting rates. History is not on their side.”

Complicating the Fed’s job, interest rates often take a while to filter through the economy. Experts say it may take a year for the full effect of a rate hike to be realized in slower job growth and fewer job openings, with the labor market often the last shoe to drop. A year ago, rates were just coming up on the so-called “neutral” rate of interest, or the point where borrowing costs are no longer stimulating economic growth.

With rates no longer stimulating economic growth, each rate hike from here could have an even greater effect on the U.S. economy. And as the bank failures from last March illustrate, risks can pop up out of nowhere and without any notice.

“If you’re balancing risks and you get less worried about the economy slowing and more worried about inflation just staying high and getting built in to the price and wage-setting process, then you might conclude you need to move faster,” says Bill English, a finance professor at the Yale School of Management, who spent 20 years at the Fed. “Lags just make the problem harder because you have to be forward-looking and judge where the economy is going to be.”

5 steps to take with your money when rates and recession risks are high

Most of the Fed’s rate hikes may be over, but each increase means higher borrowing costs for consumers — including on a credit card, personal loan, auto loan and more. Those borrowing costs are also unlikely to fall until the Fed cuts rates.

The highest rates in more than two decades means money is no longer cheap. Take steps now to prepare your finances for this new era of monetary policy, one where borrowing costs are unlikely to return to record-low levels anytime soon.

1. Keep a long-term mindset

Differing expectations about what the Fed could do with rates in the months ahead could lead to more market volatility. Plunging stocks mean pain for investors, and the possibility of a recession or even higher Fed interest rates could worsen the volatility. But don’t succumb to market volatility and change your approach. Remember, a diversified portfolio and a long-term mindset protect you through the most brutal times in the stock market.

2. Pay down debt

Consumers with fixed-rate debt, such as a mortgage, won’t feel any impact from a Fed rate hike, but you are more fragile if you have a variable-rate loan, especially if it’s a high-interest credit card. The average credit card rate has edged down from its series high, but is still at levels no consumer had ever seen before the Fed’s recent inflation fight, according to Bankrate data.

Consider consolidating that debt with a balance-transfer card to help you make a bigger dent in your principal balance, with some cards offering borrowers no interest for up to 21 months. However, the time to take advantage may be now. Many issuers don’t offer terms as generous — or get rid of those offers altogether — during tougher economic times.

Homeowners with an adjustable-rate mortgage or a home equity line of credit (HELOC) might want to consider refinancing into a fixed-rate loan. “You don’t want to be a sitting duck for higher interest rates on your credit card or home equity line of credit,” McBride says.

3. Boost your emergency savings

High inflation shouldn’t keep consumers from building up a cushion of cash in case of emergency expenses. And amid higher rates, many yields at online banks are now beating inflation. Take a careful look at your finances and find ways that you can free up cash to recycle back into your rainy-day fund.

4. Find the best place for your cash

Savers can earn even more money on their cash by switching to a high-yield savings account. Many accounts on the market are offering consumers who bank with them yields near 5 percent. If you put an initial $10,000 deposit into an account with a 5 percent annual percentage yield (APY), you’d earn $500 in interest, compared with just $25 on the average savings yield of 0.25 percent.

Savers who already have a hefty sum of money in an emergency fund may also now want to start thinking about locking in those elevated yields for the longer haul by opening a 2-year or 5-year certificate of deposit. Banks often don’t wait for the Fed to cut rates before lowering their own yields.

5. Think about recession-proofing your finances

Given that plenty of risks lie ahead for the Fed, always be on the lookout for ways that you can recession-proof your finances. Along with building up your emergency fund, experts say it comes down to living within your means, staying connected with your network, identifying your risk tolerance and staying focused on the long haul if you’re an investor.

“To relieve individuals, households and businesses of historically high inflation, the Fed has been prepared to accept the risk of a recession if it achieves the mandate of stable prices,” says Mark Hamrick, Bankrate senior economic analyst. “Choosing from the least of two evils, it isn’t dissimilar from when firefighters trade some damage from water for fire damage.”