The Impact Of The Fed Rate Hike And What To Expect Next
- The Federal Reserve hiked its target federal funds rate by 0.75% on Wednesday
- Stocks rallied Wednesday on the news before falling again by Thursday’s close
- Consumers can expect interest rates on personal, auto and home loans to rise, though their savings account rates may jump, too
- Investors can expect more turbulence ahead as stocks reckon with sky-high inflation, the Ukraine-Russia war and the future impact of rate hikes
The market rallied Wednesday after the Federal Reserve hiked its federal funds rate target by 0.75 percentage points. The increase marks the largest single jump since November 1994.
Wednesday’s Fed hike is the third (and largest) this year as the Federal Reserve attempts to wrangle sky-high inflation under control. In a statement, the Federal Reserve cited elevated inflation driven by supply chain pressure, the war in Ukraine and Covid-19 lockdowns in China as major factors in its decision.
Following the Federal Open Market Committee’s meeting, Fed Chair Jerome Powell acknowledged in a press conference that high inflation continues to cause “hardship.” However, he further admitted that the Fed’s ability to bring inflation down without causing a recession depends on “many factors that we don’t control.”
Meanwhile, economists have become increasingly pessimistic about the Fed bringing the economy in for a “soft landing.” For instance, a Financial Times survey found that most economists expect a recession next year. And in a client note, Wells Fargo wrote that they “judge that recession next year is more likely than not.”
Why do we have Fed hikes?
Before we dive into what this means for consumers and investors, let’s have a quick refresher on what Fed hikes do.
The Fed controls the federal target funds rate, which determines how much interest banks pay to borrow overnight. While consumers don’t pay this rate directly, increasing the federal funds rate often increases other interest rates, too.
By raising the funds rate, the Federal Reserve can increase the cost of borrowing money for consumers and businesses alike. This curtails Americans’ willingness – and often ability – to spend money. As a result, demand drops, and with it, prices.
Through this mechanism, the Fed’s rate hikes are one of the most effective tools it has to fight high inflation. That said, it often comes with unfortunate side effects, such as higher unemployment and even the chance of recession.
Fed rate hike: upcoming impacts on consumers
Hiking interest rates will most likely curb sky-high inflation, eventually. In the meantime, consumers will feel the pinch on both ends.
From one side, inflation continues to claw dollars out of wallets. And on the other, rising interest rates make it more expensive to buy on credit, take out an auto loan or get into a new house.
Still, it’s not all bad.
Hello, higher prime rates
Generally speaking, when the Fed raises the funds rate, the prime rate goes up, too. The prime rate is what many lenders use as a “base rate” to determine the interest on credit cards, car loans and personal loans.
As a result, over the next few months, consumers can expect their interest rates on most lending products to rise. Already, credit card rates are averaging around 16.45%%, with future increases expected before the end of the year.
Mortgage rates are also on the rise, hitting 5.97% this week compared to just 3.1% six months ago. Consumers can expect auto loan rates to start hiking soon, too.
Savings increases on the way
But consumers can expect to benefit in at least one area: deposit accounts.
Often, when the Fed hikes rates, bank deposit accounts generate higher returns, too. Already, some online and smaller banks have notched rates on savings and money market accounts as high as 1.50%. Certificates of deposit (CDs) have topped out at 2.60% this week, beating out even high-yield savings accounts. If you want that level of interest however, you are going to need to lock your money away for a five-year term.
That said, while some banks have already spiked rates, others are unlikely to follow suit anytime soon. Many large, national banks will only increase their rates marginally (if at all), as they don’t need to attract more consumers with higher savings. That’s why, even though Fed hikes are on the rise, the national average savings account interest rate remains a paltry 0.07%.
What’s in store for the market?
In the days leading up to Wednesday’s meeting, stocks plunged following shockingly high inflation data from May. But now that the dust has settled and the rate hike has passed, the market’s reaction was slightly surprising.
Wednesday, stocks rallied slightly, reassured by the Fed’s position that their next rate hike will depend on upcoming data. Investors took this to mean that while the Fed was serious about inflation, they also weren’t willing to take unnecessary risks that would plunge the economy into a recession.
Thursday saw the market come back to earth, as it were, with all three major indices ending the day in the red. Still, that’s not entirely shocking, either, given the past few months’ performance.
If the last two days are any indication, it seems likely the stock market will continue on its bumpy ride.
Investors still have time to fully digest the Fed hike news and see where the economy will feel the impacts. General economic anxiety, the Russia-Ukraine war, soaring gas prices and a market correcting from pandemic-era highs have (and likely will) continue to contribute to market volatility.
All in all, it’s uncertain exactly what the near future of the stock market holds – but it seems likely that there’s still a little ways to fall yet.
What the Fed rate hike means for you
When interest rates go up, one group of people almost always wins: the savers. Anyone with cash piled in their bank accounts stands to see greater income thanks to higher interest rates. (Assuming you bank somewhere that spikes rates when the Fed does.) That’s a big plus to anyone with a hefty emergency savings fund to fall back on.
Unfortunately, with inflation as high as it is right now, stashing money in a savings account still means losing purchasing power.
We here at Q.ai understand how important it is to maintain stability in the face of rising interest rates, soaring inflation and general economic uncertainty.
That’s why we’ve put together our Inflation Kit to help investors take advantage of sky-high inflation, even when interest rates are on the rise. For our Signature Kits, we also offer Portfolio Protection, which can offer greater security and risk protection, even when the broader market falls.
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