The Federal Reserve Raises Interest Rates Again

If you thought interest rates on loans, credit cards, or mortgages were already high, hang on tight. The Federal Reserve once again raised its benchmark interest rate by 0.75 percentage points (75 basis points) on Wednesday, bringing it to a range of 3.75%-4% with further increases expected in the future. This marks the fourth substantial interest rate hike since June and pushes this benchmark rate—known as the fed funds rate—to its highest level since 2008.

The latest rate hike came out of the Fed’s seventh meeting this year, signaling its ongoing battle against inflation. The increase will impact borrowing costs across the economy, driving up interest rates on credit cards, auto loans, business loans, and possibly mortgages as well. On a positive note for consumers, we may see growth in interest rates on bank accounts and financial products like high-yield savings accounts and certificates of deposits (CDs).

The intent behind the high interest rates is to reduce borrowing and spending, thereby decreasing demand for goods and services. This adjustment aims to rebalance supply and demand in the hopes of slowing down the significant consumer price escalation observed this year.

According to the Federal Open Market Committee, inflation remains high due to supply and demand imbalances from the pandemic, increased food and energy prices, and broader price pressures. The ongoing conflict between Russia and Ukraine is also adding to inflationary pressures and affecting global economic activity.

It is important to note that while the federal funds rate influences interest rates throughout the economy, including credit cards and loans, it is not the rate applied to individual loans. Banks usually charge a certain percentage above their prime rate, which typically runs about 3 points higher than the fed funds rate.

The economy has shown resilience to the Federal Reserve's anti-inflation measures, but experts anticipate a recession as a consequence of the rate hikes. Yet, consumer spending remains strong, and businesses are hiring and retaining employees. This ongoing growth, paired with persistently high inflation, indicates that the Fed will likely continue to raise rates, potentially causing further economic harm.

The impact of the rate hikes is evident in the housing market, where activity has slowed due to mortgage interest rates hitting levels not seen since 2001. The rate hikes have also affected stock and bond markets, posing challenges for investors and retirement savers.

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