The Federal Reserve issued its 10th consecutive rate hike since March 2022, pushing the fed funds rate to a target range of 5% to 5.25%, the highest level since 2007. It is clear that while inflation is improving, the Fed's job is not done.
"The rate increase is a sign that the fight against inflation is far from over, despite signs that things are headed in the right direction," said Bruce McClary, senior vice president of communications at the National Foundation for Credit Counseling. "It's been over a decade since we've seen such high rates."
With inflation slowing and jobless claims still below historical averages, some experts expected the Fed to halt its rate hikes this month. However, with another bank failure in the news, the recent collapse of Bank of the First Republic -- and inflation is not yet at the 2% target, the Fed's decision to gradually raise rates is not surprising.
"My colleagues and I understand the difficulties high inflation is causing, and we remain firmly committed to bringing inflation down to our 2% target," Fed Chairman Jerome Powell said at the news conference. Press conference of the meeting of the Federal Open Market Committee.
Since the beginning of 2022, the Federal Reserve has been working to moderate the rise in prices and rein in runaway inflation. From groceries to gasoline, everyday essentials they have gone up in cost. In response, the Fed has aggressively raised interest rates to try to bring prices down. As the Federal Reserve raised rates, so did the cost of borrowing, credit cards, and mortgages, making financing less affordable. However, this has also led to an increase in interest rates for savings, Deposit certificates and money market accounts.
Although this rate increase will make borrowing even more expensive, the most important takeaway from the May Fed meeting is that the Fed signaled a pause in future hikes, said Tom Graff, chief investment officer at Facet.
Here's what you need to know about inflation, what's next for the economy, and how to protect your money.
What is happening with inflation?
Inflation now sits at 5% year-over-year, according to the Bureau of Labor Statistics. That's a big difference from last year, when inflation reached record levels in June with an annual increase of 9.1%. From February to March, most categories experienced an overall decrease in costs, with a few exceptions, such as room and board outside the home. But despite slowing inflation, prices are still rising across the board, making it difficult for your dollar to stretch that far.
During periods of high inflation, your dollar has less purchasing power, so everything you buy is more expensive, even though you may not get paid more. Despite signs that inflation is cooling, many Americans continue to live paycheck to paycheckand wages are not keeping up with inflation rates.
One of the Fed's responsibilities is to keep inflation low, ideally around 2%. The Fed's previous rate hikes appear to have helped reduce inflation, but prices remain high, indicating that there is still work to be done.
What another rate hike means for the economy
Prices will not drop overnight. Experts predict that 2023 will be another difficult year as the cost of living remains high and interest rates drive up the cost of borrowing.
Many experts predict that the Fed's aggressive rate hikes send us into a recession: a contracting economy instead of a growing economy. The Fed recognizes the adverse effects and potential risks of this tight monetary policy. And at this point, a recession seems inevitable.
"I see a 70% probability of a recession right now," he said. Derek Delaney, certified financial planner and founder of PharmD Financial Planning, in March. If unemployment rises, a recession could come sooner, but what happens next with inflation will play a key role in the probability and magnitude of a recession.
โInflation was never going to return to a normal level without some economic slowdown,โ Graff said, a message Powell has been making clear for months. "Still, there is a risk of some pain as a result of this slowdown."
What this means for your money
The Fed's most recent rate hike means borrowers will continue to see higher interest rates in mortgages, Credit cards and personal loans. On the other hand, since interest rates stay high, you can benefit from higher gains on your savings.
"The Fed's rate hike can lead to higher yields on savings accounts. That's the silver lining of the equation," McClary said. โThe bad news is associated with the impact on the cost of borrowing. If you must, you will pay more.โ
If you're in debt or worried about future economic uncertainty, here are some steps you can take now to prepare.
Dealing with outstanding debt
Raising rates for the tenth time, even slightly, means that banks will follow suit, raising the cost of financing a car either buy a house. Higher rates also make it more expensive to refinance your mortgage or student loans. In addition, Fed hikes indirectly raise interest rates for Credit cardsso if you carry a balance from month to month, paying off your debt becomes more expensive.
Before taking out a new loan or mortgage, understand exactly what you will owe: the payment schedule, potential fees, and the interest rate. Make a debt payment plan to bring down balances as quickly as possible for any outstanding debt.
"Look at the numbers and make deliberate decisions," he said. bobbi rebel, certified financial planner and author of Launching Financial Grownups. "And also communicate with your family because very few of us operate in an economy of one." Consider transferring outstanding high-interest debt to a lower or fixed interest rate option, if possible, he said. You may also consider a balance transfer card -- as long as you plan to pay off the balance before interest accrues -- or a debt consolidation loan.
Check if your debt has a fixed or variable interest rate. Many home and personal loans have fixed rates, so if you recently took out a loan, you may have a high interest rate that will stay the same for the life of the loan. On the other hand, most credit cards have a variable interest rate, which means the APR is already very high (average over 20% right now) on any balance will only grow as rates rise.
And, even if we've seen the last of the Fed's rate hikes for some time, remember that the cost of borrowing won't drop overnight. "If the Fed were to slow down or stop raising rates, that doesn't necessarily mean your rate is going down. It just might mean it's not going up," Rebell said. Don't wait to take action. If you need to switch debt to a fixed-rate loan, it's best to do it now in case rates rise further in the coming months.
Set up your savings and emergency fund
"If you have extra money in your bank account, you should definitely check the interest rate," Graff said. Some traditional savings accounts have not kept up with inflation and you may be losing interest.
Savings account APRs have increased significantly this year, with many exceeding 5% APY. But savings and CD rates will soon come to a standstill. While some banks may raise rates slightly in the coming days, experts don't expect rates to go much higher. So if you've been waiting to secure a long-term CD, now is the time to act.
"Interest rates of [some] certificates of deposit, for example, are the highest in more than 15 years," Wu said.
Still, that doesn't mean you should take all your money out of a savings account.
Even if rates start to drop, build your emergency fund It's crucial. Right now, you can get good bang for your buck, but even after rates drop, we recommend keeping your emergency savings somewhere handy, like a high yield savings account. Over time, you may not get the best rate if banks don't raise APYs as aggressively as they did last year. You will have access to the money when you need it and you can continue to make regular contributions.
The most important tip is to shop around and compare rates before opening a new bank account. "CD rates, in particular, can vary widely," Wu said.
how much do you need in your emergency fund it's unique to your situation, although many experts recommend between three and 12 months of expenses. Start saving what you can now: The money can come in handy if you suffer from job loss or unexpected costs as the economic downturn continues.
