The Federal Reserve raises interest rates for the first time since 2018

For the first time in nearly four years, the Federal Reserve raised bond prices by a quarter point on Wednesday and announced plans to hike rates six more times this year, a widely anticipated but monumental move that will ripple effects on all aspects. of the financial lives of Americans.

The Federal Open Market Committee (FOMC) has set 0.25% to 0.50% as the new target range for the federal funds rate – a key benchmark borrowing rate that influences everything from auto loans and credit card rates. credit to returns from certificates of deposit (CD) and savings. accounts. Officials previously cut that rate to zero at an emergency meeting in March 2020, when the coronavirus pandemic first blew up the US economy.

Fed officials also projected a federal funds rate of 1.75 to 2% by the end of 2022, which would mean seven total rate hikes this year assuming the US central bank moves in increments. by a quarter point.

“Russia’s invasion of Ukraine is causing enormous human and economic hardship,” officials said in their post-meeting statement. “The implications for the U.S. economy are highly uncertain, but in the near term, the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.

Key points to remember

  • The Fed is raising rates to a target range of 0.25-0.5%.
  • Officials have forecast at least six more rate hikes for 2022, assuming central bankers move in quarter-point increments.
  • Policymakers have sharply lowered their economic growth forecast for 2022 to 2.8% from 4%.
  • The Fed projects inflation of 4.3% and unemployment of 3.5% in 2022.

What this means for: Mortgage rates | Savers | Borrowers | Investors

The FOMC “expects continued increases in the target range to be appropriate,” officials added.

The move is as much a vote of confidence in the economy’s recovery from the devastating outbreak as it is a signal of concern over soaring inflation. Americans’ purchasing power has declined sharply due to supply chain bottlenecks, resilient demand and a tight labor market in the wake of the pandemic. Consumer prices rose 7.9% on an annual basis in February 2022, a 40-year high. In January 2021, prices had only increased by 1.4%.

The Fed’s decision is the biggest action to date to combat this inflation. The Fed also confirmed it would end a key bond-buying plan in March that added nearly $4.7 trillion to the money supply, helping send mortgage rates to record highs and fueling a real estate boom.

“By raising interest rates, the Federal Reserve has begun the process of unwinding its pandemic-era stimulus in an effort to rein in inflation,” says Greg McBride, CFA, chief financial analyst at Bankrate. . “This is not a one-off, but the start of a series of rate hikes for the rest of this year and well into next.”

The Fed’s rate hike: what it means for you

Mortgages and refinance rates

For the most part, homeowners won’t feel any immediate impact from the Fed’s decision. That’s partly because most mortgages come with fixed rates, meaning their interest payments are fixed for the life of the loan.

It’s also because mortgage rates track the 10-year Treasury yield more than the Fed funds rate. Both, however, are still influenced by the same forces. Higher rates are almost expected this year – and in many cases the cost of financing a home is already rising – as investors factor in the likelihood of higher inflation and a central bank warmongering American.

The refinance clock is also ticking – and homeowners may miss the prime opportunity to lock in a lower rate the longer they wait. Still, even if you missed refinancing your mortgage during last year’s record lows, you might still be able to find a better deal in the market than what you’re paying now. In a rising rate environment, finding the best deal is more important than ever. Compare your current rate with what’s out there and be sure to grab offers from multiple lenders.

Savers

If you have money tucked away in a savings account, you might breathe a sigh of relief after the Fed’s rate hike. A higher fed funds rate generally leads banks to increase yields as well. If history is any guide, depository institutions follow suit almost immediately.

But for savers, all their problems won’t disappear overnight. Americans are grappling with the highest levels of inflation many have ever seen, underscoring the importance of finding the best place to park your money. Online banks are often able to offer more competitive rates than traditional banks, and many accounts in the market still offer returns 10 times the national average.

As always, having an emergency fund is an important aspect of any financial plan, even in high inflation environments.

Borrowers

Consumers in debt, especially with a high interest credit card, will want to prioritize paying their obligations promptly. Credit card rates will almost certainly rise with every Fed rate hike, and some may see their annual percentage rates (APRs) climb at faster rates than others. Credit card companies typically charge borrowers a spread on top of the prime rate, which is typically 3 percentage points higher than the federal funds rate.

Even in a rising rate environment, one factor influences how cheaply you can borrow even more than the Fed – your credit history and score. Lenders tend to reserve the best deals for those with the best on-time payment history and low credit utilization ratios. If you hope to avoid feeling the pinch of higher interest rates, make improving your credit score a goal for your personal finances.

Investors

Zero rates and a dovish bond-buying program were like candy for investors. As the Fed continues to pull out the punch bowl this year, markets are sure to have a bumpy ride. Eliminate daily volatility and focus on the long term. The Fed hopes to achieve a long economic expansion and stabilize inflation, which would bode well for your portfolio.

But the more the Fed has to raise its rates, the more the risks of recession increase. US central bankers know from experience that the main way to control inflation is to raise rates quickly. The concern, however, is that the authorities may have to tighten financial conditions so much that it could lead to an economic slowdown – or worse, a recession.

Recessions aren’t always as devastating as the coronavirus pandemic or the Great Recession that preceded it, but consider developing a recession game plan. This should include thinking about what you would do if you faced job loss. This may include reviewing your budget to ensure you are living within your means, increasing your emergency fund, seeking new training, or maintaining connections with your network to increase your employability.

With the Fed’s first rate hike on the books, all eyes are on officials’ next moves

Investors are also anticipating a series of rapid hikes this year that could bring rates back to 2019 levels.

The largest group sees a fed funds rate of 1.75 to 2% by the end of this year, reflecting a quarter-point rate hike at each remaining Fed meeting, according to CME Group’s FedWatch. Another growing share expects rates to rise to 2-2.25%, which would require a sizeable half-point hike if the Fed chooses to move only in scheduled meetings.

The Fed has been just as active before. In 2005, the Fed raised rates eight times — a year when consumer inflation averaged 3.3%, according to the Bureau of Labor Statistics.

The Fed’s trajectory boils down to inflation. Pricing pressures have remained much more persistent than authorities had anticipated in 2021, particularly in sectors prone to pandemic-related disruptions, such as gasoline, energy, furniture and automotive. ‘occasion.

But inflation has also worsened in other areas not directly related to the virus. Prices in February rose at the fastest annual rates on many items that consumers buy regularly. Among them were service-based sectors, such as car repair costs and restaurant meals, adding to fears that moving inflation tends to stay moving.

Beyond the Fed’s rate hike path, the Fed’s balance sheet is also up in the air, including whether officials will soon begin letting bonds out of its portfolio as they mature. Both can have a restrictive effect on growth, and the Fed has never changed rates and the balance sheet in quick succession.

Note: This is a developing story. Check back for updates.

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