How the Federal Reserve’s quarter-point interest rate hike impacts
The Federal Reserve Bank building
Kevin Lamarque | Reuters
The Federal Reserve raised the target federal funds rate by a quarter of a point on Wednesday, in its continued effort to tame inflation.
In a move that financial markets had completely priced in, the central bank’s Federal Open Market Committee raised the funds rate to a target range of 5.25% to 5.5%. The midpoint of that target range would be the highest level for the benchmark rate since early 2001.
After holding rates steady at the last meeting, the central bank indicated that the fight to bring down price increases is not over despite recent signs that inflationary pressures are cooling.
For now, inflation remains above the Fed’s 2% target; however, “it’s entirely possible that this could be the last hike in the cycle,” said Columbia Business School economics professor Brett House.
What the federal funds rate means to you
The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves affect the borrowing and saving rates they see every day.
This hike — now the 11th interest rate increase since March 2022 — will correspond with a rise in the prime rate and immediately send financing costs higher for many forms of consumer borrowing, putting more pressure on households in hopes of side stepping a possible recession.
“The pain that the rate hike has caused for a lot of people isn’t gratuitous,” House said. “Ultimately, this is a trade off in choices between pain now and greater pain later if inflation isn’t brought under control.”
How higher interest rates can affect your money
1. Credit card rates are at record highs
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Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, as well, and credit card rates follow suit within one or two billing cycles.
The average credit card rate is now more than 20% — an all-time high, while balances are higher and nearly half of credit card holders carry credit card debt from month to month, according to a Bankrate report.
Altogether, this rate hike will cost credit card users at least an additional $1.72 billion in interest charges over the next 12 months, according to an analysis by WalletHub.
“It’s still a tremendous opportunity to grab a zero percent balance transfer card,” said Greg McBride, Bankrate’s chief financial analyst. “Those offers are still out there and if you have credit card debt, that is your first step to give yourself a tailwind on a path to debt repayment.”
2. Mortgage rates will stay high
Because 15- and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, homeowners won’t be affected immediately by a rate hike. However, anyone…
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