The Federal Reserve just raised the federal funds rate for the 10th consecutive time since March 2022, hiking rates by 0.25%. This increase pushes the federal funds rate range to 5.00% – 5.25%, its highest level since June 2006, according to the Federal Reserve press release.
With inflation cooling and employment stable, some experts expected the Fed to pause its rate hikes this month. However, with another bank failure in the news — the recent collapse of First Republic Bank — and inflation still not at the 2% target, the Fed’s decision to raise rates incrementally is not surprising.
In Wednesday’s press release, the committee made it clear that it is “highly attentive to inflation risks” and that it hopes to “achieve maximum employment” but will keep making necessary changes to monetary policy in order to reach its 2% inflation goal.
Since early 2022, the Federal Reserve has been working to temper rising prices and tame runaway inflation. From groceries to gas, inflation has increased the costs of everyday essentials. In response, the Fed has aggressively raised interest rates, its top tactic to try to bring down rising prices. As the Fed raised rates, the cost of borrowing for loans, credit cards and mortgages also increased, making financing less affordable. However, this has also led to increased interest rates for savings, certificates of deposit and money market accounts.
With another Fed rate hike under our belt, you may wonder what’s next. Is this the last Fed rate hike? Will interest rates continue to rise? Below, we’ll cover what to expect and what the latest rate hike means for your money.
What’s going on with inflation?
Inflation now sits at 5% for all items, year over year, according to the Bureau of Labor Statistics. That’s a stark difference from last year, when inflation hit record-breaking levels in June with a 9.1% yearly increase. Most categories decreased from February to March, with exceptions in some categories, like food away from home and housing. But despite slowing inflation, prices are still up across the board.
Still, even though the first quarter of the year was a solid one for the economy with low unemployment, the Fed is tasked with keeping inflation low, ideally around 2%. Although the previous Fed rate hikes have helped lower inflation, prices remain high, indicating there’s more work to be done.
During periods of high inflation, your dollar has less purchasing power, making everything you buy more expensive — even though you may not be getting paid more. Despite positive signs from last month’s BLS Employment report — hourly nonfarm workers saw a 0.03% wage increase, for example — many Americans are living paycheck to paycheck, and wages aren’t keeping up with inflation rates.
What another rate hike means for the economy
Smaller rate hikes signal that inflation is cooling, but it doesn’t mean high prices will drop overnight. Experts predict 2023 will be another rough year as prices remain high and interest rates push up the cost of borrowing.
“Even with the goal of directing the CPI [consumer price index] back to 2%, the aggressive rate hikes in 2022 and early 2023 now are showing its wrath,” said Shannon Grey, certified financial planner and founder of InvestmentEdge Planning. Last year, Powell said the economy would feel some pain with future rate hikes, and we’re seeing some of the effects with recent bank failures, Grey adds.
“We are clearly not out of the woods,” said Grey.
Many experts still worry that further increases in the cost of borrowing money could contract the economy too much, sending us into a recession: a shrinking rather than a growing economy. The Fed acknowledges the adverse effects and potential risks of this restrictive monetary policy. And at this point, a recession seems unavoidable.
“I see the likelihood of a recession at 70% right now,” said Derek Delaney, certified financial planner and founder of PharmD Financial Planning, in March. If unemployment rises and employment is no longer stable, a recession could come sooner — but what happens next with inflation will play a key role in the likelihood and magnitude of a recession.
“Time will tell if it is a minor one or a more intense one,” said Kimberly Howard, a certified financial planner and founder of KJH Financial Services. If prices continue to go up, consumer spending is expected to slow.
What this means for your money
The most recent Fed rate hike means that borrowers will continue to see higher interest rates on mortgages, credit cards and personal loans. On the flip side, as interest rates remain high, you can benefit from boosted earnings on your savings. But it’s worth noting that with inflation still high and wages not outpacing inflation, you can’t “beat” inflation — but you can earn a better return on your savings in the meantime.
If you have debt or are worried about future economic uncertainty, here are some steps you can take now to prepare.
Build your savings and emergency fund
Savings account annual percentage rates have increased significantly this year, with many topping 5.00% APY. But savings and CD rates will soon reach a plateau. While some banks may raise rates slightly in the coming days, in light of the most recent Fed rate hike, experts don’t expect rates to go much higher. So, if you’ve been waiting to lock in a long-term CD, the time to act is now. But that doesn’t mean you should move all of your money out of a savings account.
Even if rates begin to dip, it’s still crucial to build up your emergency fund. Right now, you can earn a good return on your money, but even after rates drop, we recommend keeping emergency savings somewhere easily accessible, like a high-yield savings account, for easy access to your money. Over time, you may not earn the best rate if banks don’t raise APYs as aggressively as last year. But you’ll have access to the money when you need it, and you can continue to make regular contributions.
How much you need in your emergency fund varies, but many experts recommend between three and 12 months of expenses. Start saving what you can now — the money can come in handy if you suffer from a job loss or unexpected costs as the economic downturn continues.
Tackle new and outstanding debt
Raising rates for the 10th time, even by a little, means banks will also follow suit, pushing up the cost of financing a car or buying a home. Higher rates also make it more expensive to refinance your mortgage or student loans. Moreover, the Fed hikes will also drive up interest rates on credit cards, so if you carry a balance, repaying your debt just became more expensive.
Before taking on a new loan or mortgage, make sure you understand exactly what you’ll owe: the payment schedule, potential fees and interest rate. For any outstanding debt, make a debt payoff plan to knock down balances as quickly as you can.
“Look at the numbers and make deliberate choices,” said Bobbi Rebell, a certified financial planner and author of Launching Financial Grownups. “And also communicate with your family, because very few of us operate in an economy of one.” Now’s the time to consider paying off outstanding debt with a lower or fixed interest rate, if possible, she said. You may also consider a balance transfer card — as long as you have a plan to pay the balance before interest accrues — or a debt consolidation loan.
Be sure to check whether your debt carries a fixed or variable interest rate. Many personal and mortgage loans have fixed rates, so if you borrowed recently, you might have a high-interest rate that’ll carry through the loan’s lifetime. On the other hand, most credit cards have a variable interest rate — meaning the already very high APR (averaging over 20% right now) on any balances will only grow as rates rise.
And, even if we’ve seen the last of the Fed’s rate hikes for some time, the cost of borrowing won’t decrease overnight. “If the Fed were to slow down or stop raising rates, that doesn’t necessarily mean your rate is going down. It just might mean that it’s not going up,” said Rebell. Don’t wait to take action. If you need to move debt to a fixed-rate loan, it’s better to move now in case rates increase even more in the coming months.