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.

In pushing the benchmark fed funds rate above 5 percent for the first time since 2007, the Federal Reserve is underscoring their commitment to getting inflation under control and restoring price stability. — Greg McBride, CFA, Bankrate Chief Financial Analyst

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.”

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

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.

But those bank failures could also weigh on the economy, especially if banks tighten lending even more than they already have been in response to higher rates from the Fed. Less credit in the financial system could weigh on spending and cool inflation, meaning the Fed might not have to raise interest rates as high.

For now, however, Fed officials aren’t aware how much additional tightening the bank failures could provide — and how long it could last. Powell mentioned at the March press conference that the recent credit crunch is likely equivalent to a quarter-point rate hike. Some experts, however, say it could be worth more than that. Economists at Apollo Academy, for instance, project that tightening is equivalent to six quarter-point rate hikes.

“Policy has got to be tight enough to bring inflation down to 2 percent over time,” Powell said. “It doesn’t all have to come from rate hikes. It can come from tighter credit conditions. It’s highly uncertain how long the situation will be sustained or how.”

Financial conditions tightened in March after the two bank failures. Also that month, a measure of volatility in the bond market rose to the highest level since 2009, pointing to difficulties in trading the assets that have long been regarded as the most liquid in the world. Yet, both measures have been improving, and the S&P 500 has now erased its losses from the volatile March month.

Just seven Fed policymakers see more rate hikes from here, according to the Fed’s projections last updated in March. Three see one more rate hike, while another three officials project two more increases. One policymaker sees three more rate hikes.

One of those Fed officials expecting more increases could be Fed Governor Michelle Bowman, who has a permanent vote on the Fed’s rate-setting FOMC.

“I will look for signs of consistent evidence that inflation is on a downward path when considering future rate increases,” she said in a Friday address. She noted that the latest data from the Department of Labor tracking inflation and the job market in April “have not provided” that consistent evidence.

Policymakers won’t update those estimates until their next rate-setting meeting in June.

Markets fear that defeating inflation means starting a recession

Investors, however, don’t see the Fed lifting rates anymore from here. Officials are seen standing pat on rates at the June and July meetings, according to CME Group’s FedWatch tool. An even bigger curveball from what Fed officials are expecting, traders also see 75 basis points worth of cuts by the end of the year, the tool also shows.

Fed officials aren’t expecting to slash interest rates until 2024 — and in March, they suggested they see just 75 basis points worth of cuts rather than the previously projected 100 basis points worth of rate cuts.

The differing expectations are likely tied to the Fed’s economic outlook. For months now, investors have been bracing for a recession. 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.

The inverted yield curve has been improving at a rapid speed since early March. The spread between the 10-year and 2-year yield is now just 50 basis points apart, after holding as wide as 107 basis points on March 8. But those may highlight more bad reasons than good: Immediately before most recessions, the difference between the two yields diminishes ​​as the once-feared recession looks closer to becoming a reality.

Investors are processing more than just the Fed and regional banking turmoil. Fears of the U.S. defaulting on its debt for the first time in history are also a major economic threat.

Economists are also largely expecting a recession. Experts in Bankrate’s first-quarter Economic Indicator survey put the odds of a recession for 2023 at 64 percent — suggesting a downturn is more likely than not.

“Not only is it a concern, but the odds favor it,” McBride says. “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.”

Even Fed staff warned officials that a recession could begin this year, with the recovery taking an additional two years, according to records from the Fed’s March meeting.

Powell, however, reiterated he doesn’t see that outcome for an economy that’s been surprisingly resilient in the face of the highest interest rates in over a decade.

“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.”

Whether the economy avoids — or doesn’t avoid — a recession could have major implications for price pressures. When Americans are unemployed, demand drops, weighing on inflation.

Fed officials see inflation remaining elevated through at least 2024, after which it’s projected to hit 2.1 percent by 2025.

“We on the committee have a view that inflation is going to come down, not so quickly,” Powell said in May. “In that world, if that forecast is broadly right, it would not be appropriate to cut rates, and we won’t cut rates.”

The largest majority of Fed officials also showed they see the risks to core and headline inflation as weighted to the upside, even if a growing share of officials are starting to see those risks as balanced.

“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 air on the side of higher interest rates because of the risk of inflation being higher.”

Interest rates, however, often take a while to filter through the economy, and the job market is one of the last places they end up affecting. 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. A year ago, rates were still at near-zero percent.

With rates no longer stimulating economic growth, each rate hike from here could have an even greater effect on the U.S. economy.

“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 a decade also mean an end to cheap money. 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 keeps breaking records, hitting 20.33 percent as of May 10, 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. In fact, rising recession risks only underscore the urgency. 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 above 4 percent. If you put an initial $10,000 deposit into an account with a 4 percent annual percentage yield (APY), you’d earn $400 in interest, compared with just $23 on the average savings yield of 0.23 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.”