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4 Ways The Fed Rate Increase Can Affect Your Money – Forbes

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On March 16, the Federal Reserve delivered on it…….

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors’ opinions or evaluations.

On March 16, the Federal Reserve delivered on its longstanding promise to raise interest rates in order to fight rising inflation. The Fed has been under pressure to take measures to cool price surges that have taken inflation to its highest level in 40 years.

“We expect inflation to remain high through the middle of the year,” said Federal Reserve chair Jerome Powell at the post-Fed meeting press conference.

In a new forecast released with the rate decision, Fed economists estimated that inflation as measured by the PCE index should decline to 4.3% by the end of 2022. Compare that to the latest PCE reading, for the month of January, which measured prices up 6.1% over the prior 12 months.

Americans are anxious about the rapidly increasing costs of everyday items like groceries and gasoline, so it may seem counterintuitive to raise the cost of borrowing money when people’s finances are already strained.

However, higher interest rates—this decision is only the first of several projected rate hikes increases in 2022—should moderate demand for goods, which can in turn reduce inflation.

Why Is the Fed Raising Rates?

For months, Powell and other Fed officials have been repeating over and over that the four-decade highs in U.S. inflation rates were making tighter monetary policy an absolute necessity. It’s also become clear that the jobs market has almost entirely healed as the Covid-19 pandemic wanes.

Congress has bestowed two jobs on the Fed: Keep prices under control and promote full employment. It appears that the latter job is done, so the Fed is moving to tackle the former by tightening monetary policy.

At the March meeting, the central bank increased the federal funds rate—that’s what we mean when we talk about “raising interest rates”—by 25 basis points, to 0.25% to 0.50%. But this is only the first step in a longer journey: Analysts expect the Fed should deliver six more hikes in 2022, taking the fed funds rate to 1.9% by the end of the year.

Here’s the big challenge: The Fed must raise rates to cool off inflation, but it can’t increase rates too high or it could cause a recession.

It will take a little while to see whether rate increases can tame inflation. But tighter monetary policy will have an immediate impact on your finances, from how much you pay to borrow money to the interest you can earn in your savings account, to whether or not you should refinance your mortgage.

4 Ways The Fed Rate Increase Can Affect Your Money

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Source: https://www.forbes.com/advisor/personal-finance/fed-increases-rates-first-time-since-2018/

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