Will the most recent interest rate hike lower inflation to needed levels?

Earlier this month, the Federal Reserve raised interest rates by another quarter of a point (0.25%), in its most recent maneuver to continue to stave off the effects of still-high inflation levels on the United States economy and get inflation down to 2%. Yes, inflation is trending down, but many economists have indicated it is not occurring at a swift enough pace.

This interest rate increase represents the 10^th consecutive one made by the Federal Reserve, with the rate going from 5% to 5.25%, which marks its highest level going back to 2007. What perhaps makes this one more notable, in a sense, than prior ones is that the Fed indicated it could potentially pause rate increases to see if additional rate increases are needed.

In terms of what this most recent action by the Federal Reserve means as it relates to supply chain, freight transportation and logistics, the objective to drive down inflation remains front and center. And it should, especially when considering that consumer spending drives more than two-thirds of economic activity, and, to a large degree, that spending is what keeps trucks, freight trains, and ocean cargo vessels moving.

Paul Bingham, Director, Transportation Consulting, S&P Global Market Intelligence, told Newsroom Notes that this most recent interest rate hike serves as a clear example that inflation is still not at the level where the Fed wants it to be, despite everything it has done to get it to its current level.

“There has been some speculation that there would actually be some [interest rate] reductions by the end of the year, but that is not the way we read its current signal,” he said. “Where it is leaving the economy is understanding that there's a lag effect on their raising of the interest rates. It doesn't happen instantaneously; that translates immediately to everybody's interest rates adjusting upwards. It takes time for that to work through and, in fact, the earlier increases are still working through the banking system and through consumer and business credit…through all the mechanisms that those higher interest rates eventually affect and slowdown, the demand in the economy, which is clearly the intent of the Fed.”

Bingham also made the case that bank credit will tighten further beyond this interest rate increase, in terms of pressures on deposit levels and consumer credit standards through the third quarter and beyond. He explained this has the effect of further monetary tightening, as the Fed’s buying and selling of bonds and also the raising of interest rates to other banks as its key mechanisms to lower inflation.

“It looks at other implications of that as it works through to see how does that translate into credit demand from consumers and businesses that aren’t directly customers at the Fed,” he said. “That is where consumer demand and business demand is affected in spite of seeing higher interest rates.”

There is still likely further tightening ahead beyond this most recent rate hike, according to Bingham, which he noted will lead to further reductions in credit availability and reduce some demand, in its effort to lower inflation.

“We're forecasting a further reduction in the pace of growth as a consequence that is going to be driven by this rate increase and a further reduction in demand,” he said. “And there are also swings in inventories, with some further inventory drawdown in some sectors, such that we're still going to end this year with much slower growth. What is going to drive that is slower demand for goods, as well as some slower demand for services. That is going to play out in freight transportation markets and global trade activity.”

The next steps the Federal Reserve takes, regarding raising, or pausing, interest rates will be closely watched and probably scrutinized, given the current level of economic unease and mixed signals that are afloat. To be sure, the objective is driving inflation down. The question that remains is: how quickly will we be able to get there through these measures?