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The Fed Rate Hike and What It Means

Fed Hike

Federal Reserve Rate Hike

The Fed Rate Hike and What It Means

After two years of low interest rates, the Federal Reserve increased rates in the spring of 2022. The increase means rates on products like savings accounts, mortgages and credit cards will likely rise.

The Federal Reserve is the central bank of the United States. It is charged by Congress to maintain economic and financial stability. Typically, the Fed will reduce rates “to try to stimulate the economy and raises rates to try to head off inflation”.

What is the Fed Rate?

Understanding the importance of the Fed rate increase means first examining what it is. The fed funds rate is the short-term interest rate that banks charge each other to lend Federal Reserve funds overnight.

In a healthy economy, the fed funds rate is 2.0 to 2.5 percent. There are exceptions, though.

In June 2022, the Federal Reserve raised its target federal funds rates by .75 percentage points. It was the largest increase in nearly three decades and was an effort to slow down inflation.

Conversely, the Federal Reserve has effectively lowered rates to zero twice. Once was during the 2008 financial crisis. The other was in 2020 in the wake of the coronavirus outbreak.

Why does the Fed change rates?

The Federal Reserve uses the federal funds rate to maintain economic balance. It raises or lowers interest rates to maximize employment and stabilize inflation. These actions influence the money supply, starting with banks before trickling down to consumers.

What it means for you.

The rate hike means interest rates on things like mortgages, credit cards and auto loans are also going up. One thing consumers can do when rates go up is to start paying down debt, especially on credit cards and other variable rate debt, and increase the amount they are saving.

Bottom Line

The Fed has raised rates multiple times in 2022 and more hikes are expected as the country faces inflation. That means consumers should prepare for even higher interest rates if the rate continues to go up.