Interest Rates Are Higher & Higher

The Federal Reserve raised interest rates by 75 basis points, the largest increase in 28 years. Here's how it might affect your finances.

The Federal Reserve raised interest rates for the first time in almost 30 years on June 15th, 2022. The federal funds rate was increased by 75 basis points (bps) to a range of 1.50% to 1.75%.

This follows smaller rate rises by the Federal Open Market Committee (FOMC) in March and May, all as part of the central bank's plan to combat persistently rising inflation. The Fed's decision today is more aggressive than the 50-basis point hike that had been widely anticipated until recently.

Fed Chair Jerome Powell said at a press conference that the Fed had hoped to see inflation flatten by now, but that recent increases in the Personal Consumption Expenditures (PCE) Price Index and the Consumer Price Index (CPI) indicated that tougher measures than a 50-basis point increase were required.

Powell also warned that employment would slow in the next year.

Why Is the Fed Raising Rates?

The short answer – To get record-high inflation under control. The double-digit percentage rises in the cost of just about everything needed for survival – food, gas, and utilities. Powell and other Fed officials have been saying for months that the four-decade highs in US inflation rates make tighter monetary policy an unavoidable necessity. As the Covid-19 epidemic fades, it's also become evident that the employment market has almost fully recovered. The Fed has two mandates from Congress: to keep prices under control and to foster full employment. The Fed looks to have completed the latter task; therefore, it is turning its attention to the former by tightening monetary policy.

The fundamental problem is that the Fed has to raise rates to keep inflation in check, but it can't raise them too high, or the economy would enter a recession. And other analysts feel it's becoming more difficult for the Fed to walk this fine line and avert a recession.

It will take some time to determine whether rate hikes can bring inflation under control. Tighter monetary policy, on the other hand, may have an immediate effect on your finances, affecting everything from your borrowing ability to the interest rate on your savings account and whether or not you should refinance your mortgage. The reality could be much worse for the average American household as the Fed’s monetary policies are creating unaffordable monthly mortgage payments whilst they are struggling to heat and feed themselves.

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