How will the rate hike affect you?

New York, USA (CNN) – The Federal Reserve is escalating its war on inflation, which means borrowing costs will rise sharply for families and businesses.

The US Federal Reserve on Wednesday raised its benchmark interest rate by three-quarters of a percentage point, the largest increase since 1994. This comes on the heels of the Federal Reserve’s decision to raise interest rates by half a percentage point in May, the largest increase in 22 years .

The fact that the Fed is moving shows decisive confidence in the health of the labor market. But the speed with which interest rates are expected to rise highlights growing concerns about rising living costs.

High inflation is likely to force the Fed to raise interest rates several times in the coming months. Federal Reserve officials could turn to additional large interest rate hikes in an effort to cool inflation.

Americans will first experience this shift in policy through higher borrowing costs: it has become more expensive to get mortgages or car loans.

The Fed is accelerating or slowing down the economy by moving interest rates up and down. The Federal Reserve made borrowing almost free of charge when the pandemic surfaced, in an effort to encourage spending by households and businesses. The US Federal Reserve has also raised trillions of dollars to boost the economy devastated by the Covid virus through a program known as quantitative easing. And when credit markets froze in March 2020, the Fed put in place an emergency credit facility to prevent a financial collapse.

The Fed succeeded in the bailout plan, it did not yield a financial crisis due to Covid. Vaccines and massive spending by Congress paved the way for a speedy recovery. However, its emergency measures – and the delay in removing them – have also contributed to today’s overheating economy.

Unemployment is currently close to a 50-year low, but inflation is very high. The US economy no longer needs all that help from the Federal Reserve. Now the Fed is slowing down the economy by aggressively raising interest rates.

The danger is that the Fed raises interest rates too much, slowing the economy to the point that it inadvertently causes a recession that leads to higher unemployment.

Borrowing costs rise

Every time the Federal Reserve raises interest rates, it becomes more expensive to borrow. This means higher interest costs on mortgages, equity lines of credit, credit cards, student debt and car loans. Business loans will also be at higher rates for large and small companies.

The most tangible way to have this effect is through mortgages, where an increase in interest rates has already led to higher prices and a slowdown in selling activity.

How will interest rates rise?

Investors expect the Federal Reserve to raise the top of its target range to at least 3.75% by the end of the year, up from 1% today.

The Fed raised rates to 2.37% during the peak of the last rate hike cycle in late 2018. Interest rates rose to 5.25% before the Great Recession of 2007-2009.

In the 1980s, the Federal Reserve, led by Paul Volcker, raised interest rates to unprecedented levels to combat hyperinflation. At its peak in July 1981, the effective federal fund rate exceeded 22%.

However, the impact on borrowing costs in the coming months will depend mainly on the rate of interest rate hikes by the Federal Reserve, which have yet to be determined.

Good news for savers

Low prices have affected savers Funds stored in savings, deposit certificates and money market accounts did almost nothing during the pandemic.

But the good news is that as the Fed raises interest rates, those savings rates will rise, so that savers will start earning interest again.

But it takes a long time. In many cases, especially with traditional accounts at large banks, the effect will not be felt overnight.

Even after several interest rate hikes, savings rates will remain very low, below expected inflation and returns in the stock market.

Markets need to adapt

No interest rates push down government bond prices, essentially forcing investors to bet on riskier assets such as equities.

The high rates posed a major challenge to the stock market, which was accustomed, if not addicted, to easy money. US stocks plunged into a bear market on Monday amid fears that aggressive Fed rate hikes would push the economy into a recession.

The final impact of the stock market will depend on how quickly the Federal Reserve raises interest rates and how the underlying economy and corporate profits perform in the future.

swollen cooler?

The purpose of the Fed’s rate hike is to control inflation while keeping the labor market recovery intact.

Economists warn that inflation could worsen, as fuel prices have continued to reach record levels in recent days, exacerbating a rally that began after Russia’s invasion of Ukraine.

Everything from food and energy to metals is getting more expensive, and it could take a while for the Fed’s high interest rates to start dampening inflation. Until then, inflation will remain subject to developments in the war in Ukraine, supply chain chaos and, of course, COVID.

Leave a Comment