What to Know About the Fed’s Latest Interest Rate Hike

On July 27, 2022 the Federal Reserve hiked interest rates by three-quarters of a percentage point, raising the range to 2.25-2.5%.[1] In the Fed’s statement, inflation remains the main concern driving this action, with the war in Ukraine adding “additional upward pressure on inflation.”

In fact, a recent study found that 96% of Americans are concerned about rising prices for food and consumer goods, with 75% saying they are very concerned.[2] At a press conference after the hike was announced, Fed Chair Jerome Powell said, “My colleagues and I are strongly committed to bringing inflation back down, and we are moving expeditiously to do so…[T]he current picture is plain to see: The labor market is extremely tight, and inflation is much too high.”

Let’s take a look at the Fed’s funds rate and how it might impact you.

The federal funds rate is the interest rate at which banks and credit unions lend each other money overnight. For example, a bank with surplus cash could lend it to another bank to boost their cash reserves.[3]

The Federal Open Market Committee (FOMC) sets this rate. They meet eight times annually to determine whether the federal funds rate should be raised, lowered, or left as is. Raising the rate is used as a tool to slow down an economy the FOMC believes is overheated or struggling with inflation, while lowering the rate can fire up an economy the FOMC believes is growing too slowly.

Why do they interfere with the economy in the first place? It’s literally their job. The Federal Reserve System as a whole serves two purposes called the dual mandate. That dual mandate is two economic goals: maximum employment and price stability.[4]

So the FOMC meets and reviews economic data, such as prices, wages, employment numbers, consumer spending, and more to determine how to act. Their goal is to keep the economy strong while keeping prices stable and keeping as many people employed as possible. That “keeping prices stable” part is what this latest rate hike is focused on.

The Consumer Price Index increased 9.1% over the past 12 months and Americans see inflation as the top problem facing the nation.[5,6] According to the Pew Research Center, year-over-year inflation has only topped 5% four times from 1991 to 2019, and the U.S. isn’t the only place seeing substantial inflation. Almost all of the 44 countries with advanced economies that Pew analyzed had seen significant consumer price inflation since 2020.

Meanwhile, the unemployment rate is low and wage growth is steady.[7] While this is a good thing for workers, it puts even more pressure on the Fed to raise interest rates.

So, you might be asking, what does this mean for you? How are you impacted by how much banks charge to lend each other money? Well, we can all hope that the skyrocketing costs of fuel, groceries, and other consumer goods will stabilize, as the Fed intends. But more directly, the federal funds rate will impact your loans and savings.

An interest rate hike from the Fed will usually mean a corresponding hike on any credit lines with variable interest rates, like credit cards.[8] It’s also bad news for anyone looking for a home or a car right now, as the already very high borrowing costs in the mortgage and auto loan sectors are like to rise as well.

On the plus side, you’re likely to see an improvement in the rate you’re earning on any deposits. An interest rate hike usually means that banks and credit unions will begin to offer higher rates on savings accounts, though banks often lag in raising their deposit rates while wasting no time in hiking their lending rates.

The short-term outlook is likely to be tough. The goal, more or less, is to slow economic growth by hitting us where it hurts—the wallet.[9]

As for the long-term, even economists aren’t sure. It’s an odd market right now, with inflation the highest it’s been in 40 years while the job market is blazing hot and the stock market seems especially volatile. Lou Crandall, chief economist for Wrightson ICAP LLC, told Bloomberg that he puts the odds of a recession at 50-50: “The Fed’s tools are power tools. They’re not precision tools.”[10]

But if the Fed pulls it off, we’ll hopefully dodge a recession and see prices stabilize while the labor market remains strong.