With its first interest rate increase since 2018, the Fed indicated an aggressive path forward.
In a careful balancing act, the Federal Reserve is attempting to address spiraling inflation without tanking economic growth. Its benchmark rate has been anchored near zero since the COVID pandemic broke out. The first increase will be a quarter percentage point, or 25 basis points.
The move will immediately send financing costs higher for consumer borrowing and credit. The committee expects to raise rates further at each of its remaining six meeting this year, reaching a consensus funds rate of 1.9% by the end of 2022. The committee anticipates another round of hikes in 2023 but none the following year.
What It Means For You
The average American will feel the impact of rising rats on both an individual and household level. As interest rates go up or down, other rates react. Those changes impact how we borrow and how we save money.
“Raising the interest rate is about creating an inducement to save,” said Laura Veldkamp, professor of finance and economics at Columbia University. “It’s basically a deterrent to consumption spending. When an economy is overheated, raising the interest rate is a way to pull back and say, ‘I’ll hold on and postpone that spending.’”
Shopping for a house? Mortgage payments will cost you a bit more each month. Similarly, make sure you double check your numbers if you’re in the market for a new car. Credit card rates will also rise, making it costly to hold credit card debt. For millions of Americans who were already struggling with pandemic-related financial stress, that news hits a little harder.