On Wednesday, the Fed raised interest rates for the fifth time this year by another 0.75 percentage points.
The news was somewhat anticipated after last week’s less-than-positive inflation update.
But what exactly does this mean and how does it affect the average American’s day-to-day?
What does a percentage point increase mean?
Percentage point increases in federal interest rates translate to an increase in spending based on every $10,000 per year, meaning a 0.75 percentage point increase means an extra $75 of interest on every $10,000 of debt for the year.
However, it should be noted that since the Fed has already hiked interest rates four other times this year, the total amount that interest rates have been hiked this year is 3.00 percentage points, which means Americans will face an extra $300 in interest per every $10,000 of debt.
Why is the Fed raising rates?
Although inflation rates slowed down last month, they are still close to a 40-year high, with the CPI rising an estimated 8.3% in a 12-month period as of the end of August.
In raising interest rates, the Fed’s hope is that consumer demand for purchases will decrease which will, in theory, help lower inflation rates while simultaneously avoiding a recession.
What will become more expensive?
Credit card interest rates, mortgage payments, and long-term loans (student loans, personal loans, etc) that you’re already paying off may get more expensive, especially if they’re heavy debts.
This will also apply to new lines of credit, although the exact percentage of increase will be seen in the days ahead.
This does not include payments on federal student loans, which have interest suspended until December 31.
Will this be the last hike of 2022?
As a recession looms and the Fed continues to grapple with inflationary concerns, the chances of more hikes this year are high.
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook,” the Fed said on Wednesday. “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”
Economists are now predicting that the terminal rate, which is the highest the Fed will hike rates before it starts making cuts, could reach as high as 4.5% by next year.